CFTC charges FXCM with undercapitalization related to the 2015 Swiss Franc spike – but why now?


In a very bizarre filing, the U.S. Commodity Futures Trading Commission (CFTC) filed a civil enforcement action today against the Forex Capital Markets LLC unit of Retail Forex broker FXCM Inc (NYSE:FXCM), charging FXCM with undercapitalization, failure to timely report its undercapitalization violation, and guaranteeing against customer losses.

What’s bizarre about the CFTC filing?

The filing relates to FXCM’s near bankruptcy more than a year and a half ago, on January 15, 2015. As is now fairly well-known in the Forex industry, the Swiss Franc spike of January 15, 2015 left FXCM with a large (nearly $275 million) loss in the form of negative client balances – money owed to it by clients who were short the CHF and lost big, but who had very little capital on deposit with FXCM due to the large leverage allowed in FX trading by FXCM and by nearly every other Retail Forex broker.

FXCM CEO Drew Niv
FXCM CEO Drew Niv

However in a fairly deft move by the company and its CEO Drew Niv, FXCM rectified its capital situation very quickly by negotiating a $300 million rescue loan from Leucadia National Corp (NYSE:LUK) in less than 48 hours following the ‘event’. The loan solved FXCM’s capital problem and allowed FXCM to keep operating, although it came at a very large cost to FXCM shareholders.

And FXCM has more than survived since then (as we discussed in a recent interview with Drew Niv), continuing to be one of the largest retail forex brokers by volume month after month.

So the timing of the CFTC’s announcement is very strange. The issue was solved more than 18 months ago. The only thing which could be accomplished by the CFTC’s filing is provide negative publicity to FXCM, at a time when it is still trying to dig itself out of trouble and repay the loan to Leucadia.

FXCM representatives were not available for official comment. However we understand that they are working on a formal statement to be released later tonight or Friday. And we’re fairly sure that they will point out the ridiculousness of the CFTC’s filing, given that the problem was solved quite a long time ago, in a very public (and timely) manner.

We will continue to follow the situation for our readers, and we’ll bring you the likely FXCM response statement when it becomes available. In the meantime, the CFTC’s full complaint reads as follows:

[divide]

August 18, 2016

CFTC Charges Forex Capital Markets, LLC with Undercapitalization, Failing to Timely Report Undercapitalization Violation, and Guaranteeing against Customer Losses

Washington, DC – The 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 Forex Capital Markets, LLC (FXCM), charging FXCM 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.

The full CFTC complaint can be accessed here.

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  • topesto

    Dror Niv ( aka. Niv The Crook Fatso) should have been put in a jail cell long long time ago for defrauding shareholders ,clients, and CFTC. That fat pig has been getting away with this scams long enough.Apparently ( and considering the tribe he is belong to) He has good connections in SEC and CFTC , that’s why every time he is being getting away with just a slap on the hand.It is time for FBI to step in and stop his frauds once in for all. It is about time…..

    There is already an ongoing class action lawsuit against Niv The Crook and his criminal buddies board of directors ,But it is way over due for government to start a criminal investigation and charge this pig with stock fraud and defrauding shareholders. Time is now

  • Incompetent Drew Niv

    Incompetence to the highest degree. Time for useless idiot Drew Niv to pay for losing all shareholder value iwth his incompetence and unregulated activities in Bermuda.

  • Michael Markarian

    I never understood how the loan that FXCM received was considered acceptable as net capital. It was my understanding that a loan could not be considered as acceptable and net capital would need to be an equity investment. If FXCM failed to file notice to the CFTC then it makes sense why they were able to operate but I am surprised there was no coordination with CFTC and NFA.

    • LeapRate Staff

      Good question Michael. But it is actually fairly simple, and a basic structure used by many companies in many regulated industries.

      The loan (from Leucadia) is made to the parent company, in this case the publicly traded FXCM Inc. Remember that FXCM Inc isn’t itself regulated, and doesn’t do anything other than own shares in its various regulated subsidiaries in the US, the UK, Australia… Then FXCM Inc takes the funds and invests it as equity in its regulated US subsidiary, Forex Capital Markets LLC (which as per above is technically the company being charged by the CFTC).

      The downside from the lender’s point of view is that his security is just the assets of FXCM Inc, which are the shares FXCM Inc owns in its subsidiaries. Were the US subsidiary Forex Capital Markets LLC to file for bankruptcy in the future, the lenders which lent to Forex Capital Markets LLC directly would have first claim on all its assets. That’s why most banks prefer to lend directly to operating companies, not to their holding company parents.

      And that’s how you turn debt into equity!

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CFTC charges FXCM with undercapitalization related to the 2015 Swiss Franc spike - but why now?

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