Segregation of client funds looks likely in the U.S.

In the aftermath of the bankruptcy of MF Global, in which more than $1 billion in client money has gone missing, U.S. regulatory authorities are about to introduce new rules requiring segregation of client funds for financial firms which hold client money, including Forex firms.

The CFTC will be holding a two-day public roundtable later this week, Wed Feb 29-Thu Mar 1, on the topic. Our understanding from people close to the regulatory committees involved is that such a roundtable would not be held unless (barring something unforeseen such as a huge public backlash) the recommendations of the roundtable will be accepted very soon after.

Ironically, despite being among the toughest regulators globally,  the CFTC and NFA do not currently require U.S. FCMs or RFEDs (including Forex brokerages such as FXCM and Gain Capital) to segregate client funds.

The new regulations, if passed, will in our view cause several of the smaller U.S. regulated firms to leave the country outright. Why? As the CFTC’s minimum capital requirement of $20 million does not increase much as client funds held increase, we understand that several Forex brokers have been taking foreign clients into their U.S. subsidiaries, thereby freeing up their funds (which until now have not been required to be segregated) and not causing an increase in required capital, as would happen if they were held, say, in Europe. With client fund segregation required in the U.S., that “loophole” would effectively be removed, leaving certain firms with no more reason to maintain their U.S. regulated status.

For more on Forex regulation worldwide see the LeapRate-Dow Jones Forex Industry Report.

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