IBFX banned from the US market: A detailed look at the NFA’s reasons

Following yesterday’s report by FinanceFeeds that IBFX, the US subsidiary of Japanese electronic trading giant Monex Group, had been subject to further regulatory censuring due to not maintaining the correct capital adequacy requirements for a second time in two years, the National Futures Association (NFA) has permanently banned the company from membership, putting an end to the firm’s presence in the United States just a few weeks after it sold its remaining client base of 2,000 Tradestation users to OANDA Corporation.

Yesterday, the Commodity Futures Trading Commission (CFTC) issued a $1 million fine to IBFX for another dip below capital adequacy requirements, an infringement for which the company was fined $600,000 in December 2014, suggesting that it was unable to meet its financial requirements for some time.

IBFX has gradually moved out of the US, selling its MetaTrader 4 client base in Australia and the United States to FXCM in September 2014, and then recently offloading its remaining clients which had used the proprietary Tradestation platform.

A shrewd move indeed was made by OANDA Corporation in taking on 2,000 domestic market clients which have a preference for a good quality proprietary platform, especially considering that IBFX would have had to cease operations in the US just weeks later.

In making its decision to ban IBFX from operating in the United States, the NFA’s complaint which was filed on November 2, 2015 has been concluded, thus making it clear that IBFX would have been aware of the NFA’s likelihood of banning the firm, hence its migration of its final remaining traders.

What led to the ban?

ln addition to the financial deficiencies cited in the CFTC’s case, NFA issued IBFX a staff letter in March 2012 after the firm fell below its net capital requirements as of January 31, 2012 by approximately $171,000 as a result of the firm improperly classifying a receivable as a current asset when it should have been reported as non-current.

The firm addressed this shortfall by collecting the receivable and obtaining a capital infusion of $1 million from its parent company. However, IBFX was almost one month late in filing the required notification with NFA that it had fallen below its minimum net capital requirement.

IBFX hit substantially by Swiss National Bank ‘black swan’ event

According to the NFA, IBFX also suffered a significant capital shortfall in early 2015 when the Swiss National Bank (SNB) abandoned its cap on the Swiss franc’s exchange rate against the euro, causing significant turmoil in the worldwide currency markets.

After learning of the SNB’s action, NFA staff immediately contacted Member firms. On January 15, 2015, NFA spoke with IBFX’s Chief Financial Officer Fernando Fussa, and its Vice president of Global Forex Operations, Patrick Kennedy, both of whom represented to NFA that the market event involving the Swiss franc had no material effect on IBFX’s customers or on the customers of IBFX’s affiliates, including IBFX Australia pty. Ltd. (IBFX AU), which offsets its business through IBFX in America.

Australian division creates larger than expected trading deficit

However, IBFX personnel later discovered that the firm was actually undercapitalized from January 15 to February, 2015 by as much as $9 million due to the firm’s failure to factor into its ANC computation the trading deficit incurred by its Australian affiliate.

The NFA commenced an exam of IBFX in July 2014. originaily, the exam had been scheduled to begin in February 2015 but, due to the software malfunction that IBFX experienced in June 2014, NFA decided to start the exam sooner. The primary purpose of the SD exam was to review the role and duties of the firm’s CCO under CFTC Regulation 3.3 and the effectiveness of the CCO’s
monitoring of the firm’s various business areas, including its risk management program.

NFA unsatisfied with tenacity of senior management

The NFA exam found a number of deficiencies in the way in which Mr. Walton performed his duties as the firm’s CCO and monitored the firm’s business areas, including its risk management program, with which NFA also found serious deficiencies.

ln addition to the exam, the NFA commenced its annual exam of IBFX’s FDM operations on January 20, 2015, a few days after the Swiss franc event. In addition to the capital shortfalls alleged above, NFA’s FDM exam found further financial deficiencies at IBFX and other shortcomings that resulted from inadequate internal controls, poor recordkeeping and lax supervisory systems.

Sale of 13,500 IBFX MT4 accounts netted $15.2 million; IBFX miscalculated floating P/L

The NFA states that IBFX’s Forex Risk Disclosure Statement, which a customer is required to acknowledge and sign prior to opening an account with IBFX, was also deficient in that it contained inaccurate information about the profitability of the firm’s customer accounts, by including performance information for non-customer accounts and excluding unrealized profits/losses.

ln September 2014,IBFX sold a part of its retail business to a competing FDM, which resulted in a bulk transfer to the other FDM of about 13,500 accounts with a combined net liquidating value of approximately $15.2 million. However, due to system errors, IBFX miscalculated the floating/unrealized profit and loss values for approximately 700 of the customer accounts that were transferred.

IBFX also transferred some customer accounts to the FXCM, where the customers had opted-out of the transfer, causing positions that the customers had closed at IBFX to be erroneously re-established at FXCM. By reason of the foregoing acts and omissions, IBFX is charged with violations of NFA Compliance Rule 2-10.