SNB Black Thursday has not been forgotten: FXCM charged by CFTC for undercapitalization

The CFTC cites that on January 15, 2015 when the SNB removed the 1.20 peg on the EURCHF pair, FXCM admitted it had a shortfall of at least $200 million under its adjusted net capital requirement, meaning FXCM had liabilities exceeding its assets by approximately $175 million.


Sometimes doing the right thing does not always result in the best outcome.

FXCM, one of now only three retail OTC brokerages that operates in the United States alongside peers GAIN Capital and OANDA Corporation now that electronic trading giant Interactive Brokers has begun concentrating on large, high value clients only, was one of the very first FX brokerages to completely do away with the dealing desk and send all orders to the liquidity providing banks.

On January 15, 2015, the Swiss National Bank suddenly removed the 1.20 peg on the EURCHF pair with no prior warning, exposing many companies in this industry to negative client balances due to the extreme volatility that the Swiss National Bank’s action created.

FXCM was one of the casualties of this, its STP methodology, whilst very transparent and very good for customer confidence, allowing all retail clients to gain direct acccess to live markets with no internalization by the broker, creating risk should volatility ensue.

FXCM’s directors handled this situation with aplomb, securing a loan from Leucadia over a weekend, and having just a matter of hours to rectify the company’s capital position before the regulators interject. This took place and CEO Drew Niv explained shortly afterwards to FinanceFeeds during a meeting in New York that, bearing in mind the loan was granted on a handshake, with no time for management consultancies to conduct due diligence and no exact reckoning as to what the actual exposure to negative balances was, the company was maintained in exactly the same condition as it was pre-January 2015.

A year and a half has now passed, and the regulatory authorities have demonstrated that they have long memories and a very stringent eye for detail.

In the late hours of yesteday,t he U.S. Commodity Futures Trading Commission (CFTC) filed a civil enforcement action in the U.S. District Court for the Southern District of New York against FXCM, charging the company with undercapitalization, failure to timely report its undercapitalization violation, and guaranteeing against customer losses. FXCM, with headquarters in New York, New York, is registered with the CFTC as a Retail Foreign Exchange Dealer (RFED).

The CFTC Complaint, filed on August 18, 2016, alleges that FXCM, as an RFED in the business of offering or engaging in retail off-exchange foreign currency transactions, was required to maintain adjusted net capital of approximately $25 million on January 15, 2016. However, the Complaint alleges that on that day FXCM admitted it had a shortfall of at least $200 million under its adjusted net capital requirement, meaning FXCM had liabilities exceeding its assets by approximately $175 million.

As alleged in the Complaint, the capital shortfall followed the removal of the 1.2000 EUR/CHF fixed exchange rate, also known as the “peg,” and the drop of the EUR/CHF rate to 1.1659. FXCM’s systems were not designed to prevent or diminish the effects of such a market event, leading to increased losses. FXCM’s capital shortfall was not resolved until January 16, 2015, when FXCM sought and obtained a loan of approximately $279 million from a large conglomerate holding company, according to the Complaint.

The Complaint also alleges that FXCM failed to immediately notify the CFTC when it knew or should have known that its adjusted net capital was less than that required under the applicable CFTC regulation and that it was, therefore, undercapitalized. In fact, FXCM never affirmatively gave notice to the CFTC, and it was only after the National Futures Association (NFA) and the CFTC initiated contact that FXCM provided notice of its capital deficiency, according to the Complaint.

The Complaint also alleges that FXCM had an advertised policy of zeroing out negative customer balances, effectively guaranteeing customers against loss in contravention of CFTC regulations. FXCM’s policy of zeroing out negative customer balances was memorialized in FXCM’s customer account opening documents, which had a provision stating that if the customer incurred a negative balance through trading activity FXCM would credit the customer account with the amount of the negative balance, according to the Complaint.

In its request for relief against FXCM, the CFTC seeks civil monetary penalties and a permanent injunction against future violations of federal commodities laws, as charged.

Photograph: FXCM headquarters, Manhattan, New York. Copyright FinanceFeeds

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