A litany of NFA fines and complaints, dating back 10 years. Here’s the latest. Does the US want them out?…
A litany of NFA fines and complaints, dating back 10 years. Here’s the latest. Does the US want them out?
Floridian electronic trading company IBFX is in receipt of a complaint by the National Futures Association (NFA) which charges the company of non-compliance with capital adequacy requirements, as well as failure to implement an adequate risk management program.
The company, which is a subsidy of Japanese electronic trading giant MONEX Group, and sold its US and Australian MetaTrader 4 client base to FXCM Inc (NYSE:FXCM) early this year for $5.4 million, stands charged by the NFA that it failed to enter into agreements with foreign institutions that held assets to cover the firm’s customer forex liabilities as well as failed to maintain complete and accurate books and records.
In addition, the complaint charged IBFX and principal Herbert L Walton with failing to adequately supervise the firm’s operations and its employees.
This is not the first time in recent years that IBFX has been a target of the NFA’s all-seeing eye. In October 2013, the company was fined $600,000 for failing to report FX trade execution data between 2010 and 2011 in the advent of its acquisition by MONEX Group.
That particular complaint, which resulted in the fiscal penalty of $600,000 centered on trade ‘warehousing’in which IBFX acted as the counterparty for trades whose value was less than the notional volume threshold level that IBFX had established for STP trades.
IBFX then aggregated the ‘warehoused’ trades for risk management purposes and then earned revenue from the bid/ask spread from the beneficial movements in the market that concerned the ‘warehoused’ trades.
Under the STP model, once a customer clicked on the bid/offer price, which included IBFX’s mark up which was predefined, IBFX would then fill the customer’s order but only after the company had filled the offsetting position with a liquidity provider. This particular practice is known as a contra-fill.
This time, it is not execution practices that are under the NFA’s notoriously scrutinous microscope, but net capital adequacy and risk management.
As of November 30, 2014, the date of NFA’s most recent annual exam of IBFX’s FDM operations, IBFX had almost 8,000 retail forex accounts, approximately $946 million in retail customer liabilities, and approximately $2 million in ECP liabilities.
The firm’s adjusted net capital (ANC), at that time, totaled almost $28 million and its excess net capital (ENC) exceeded $3.6 million. Mr. Walton has been an NFA Associate since January 2005. He became a forex associated person (AP) and principal of IBFX and the chief compliance officer (CCO) of the firm’s FDM activities in January 2011, when the firm became an NFA Member.
Mr. Walton has served as CCO of IBFX’s SD operations since the firm became provisionally registered as an SD in 2013.
IBFX was formerly known as “TradeStation Forex, lnc.” which was the surviving entity of a December 2011 merger with lnterbank FX LLC (lnterbank FX), a former Utah limited liability company and NFA FDM Member. As the result of the merger, TradeStation Forex, lnc. acquired Interbank FX’s proprietary risk management software and all of its customer accounts, and retained some of its employees, including its compliance director.
So many fines, so much form…. Why?
In May 2012, TradeStation Forex, Inc. changed its name to IBFX. Prior to the merger, the former lnterbank FX had been the subject of four BCC actions. In 2013, Interbank FX was charged with failing to maintain complete and accurate records and failing to timely report trade data and other required information to NFA. IBFX – as lnterbank FX’s successor – settled the 2013 case by agreeing to pay a $600,000 fine, and lnterbank FX’s NFA membership was withdrawn.
In 2009, lnterbank FX was charged with failing to develop and implement an adequate anti-money laundering program and failing to adequately supervise its operations, including its electronic trading system. lnterbank FX settled the case by paying a $225,000 fine and having an independent review performed of its electronic trading system.
In 2007, lnterbank FX was charged with using misleading promotional materials. lnterbank FX settled the 2007 case by paying a $100,000 fine. ln 2006, lnterbank FX was charged with failing to collect the required security deposit from retail forex customers. lnterbank FX setiled the 2006 case by paying a $25,000 fine.
In late 2011 – following the merger with lnterbank FX – IBFX (then still known as Tradestation Forex, lnc.) became subject to NFA’s enhanced supervisory requirements (ESRs), under NFA Compliance Rule 2-9(a), because 20% or more of its APs had previously been employed by one or more Disciplined Firms.
At the request of IBFX, NFA’s Telemarketing Procedures waiver Committee (Telemarketing committee) granted the firm a full waiver of the ESR requirements, contingent upon the firm maintaining ANC above the early warning requirement under CFTC rules (i.e., 110% of the minimum net capital requirement).
In November 2014,lBFX asked the Telemarketing Committee to terminate the higher minimum capital requirement. NFA’s response to IBFX’s request advised the Telemarketing Committee that the higher ANC requirement should remain in place, in part, because of IBFX’s continuing difficulty complying with its financial requirements. The Telemarketing Committee denied IBFX’s request, and the firm’s higher ANC requirement remains in effect.
IBFX’s financial deficiencies led the CFTC to charge IBFX in December 2014 with failing to meet its minimum net capital requirements on three occasions between 2012 and 2014 and for failing to diligently supervise its employees and agents. One of the three net capital shortfalls cited in the CFTC action occurred in June 2014 as a result of a software malfunction that triggered a substantial number of erroneous trades on an IBFX server.
IBFX settled the CFTC charges by agreeing to pay a $600,000 civil monetary penalty and to perform certain undertakings, including retaining an independent third-party consultant to review and evaluate IBFX’s information technology and prepare a written report with recommendations for improvement.
$1 million capital infusion not enough
In 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 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.
SNB Black Thursday fall out triggers NFA discourse
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 (Fussa), and its Vice president of Global Forex Operations, Patrick Kennedy (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.
However, IBFX personnel later discovered that the firm was actually undercapitalized from January 15 to February 5, 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.
The NFA’s SD exam found a number of deficiencies in the way in which Walton performed his duties as the firm’s Chief Compliance Officer and monitored the firm’s business areas, including its risk management program, with which NFA also found serious deficiencies.
ln addition to the SD exam, 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.
Therefore, after all of this 10 year-long list of fines and censuring, does the NFA want IBFX out of the US altogether?#b book, #broker, #execution, #featured, #fines, #IBFX, #NFA, #retail forex, #US