FXCM sells its US clients to Gain Capital as it exits US Forex market

Following our earlier report that New York based retail forex broker FXCM Inc (NASDAQ:FXCM) had been banned from the US market (alongside bans for CEO Drew Niv and co-founder William Adhout) after FXCM settled allegations of defrauding customers regarding its market making activities, FXCM has put out a statement confirming the settlement with US regulators CFTC and NFA.

FXCM also gave more details as to what will happen to its US customers.

FXCM reported that it had come to an agreement with rival Gain Capital Holdings Inc (NYSE:GCAP), for Gain to purchase FXCM’s US customer accounts and integrate them into Gain’s existing retail Forex.com and institutional GTX brands.

No monetary details of the agreement with Gain Capital was given, other than to note that FXCM’s US customers generated $48 million of Revenue for the company in 2016, which we estimate to be about 18% of FXCM’s overall Revenues. And, that FXCM lost money on those customers.

There is a silver lining in all this for FXCM and its shareholders. FXCM stated that with the sale proceeds it receives from Gain Capital, plus the $52 million in regulatory freed up by exiting the US market, it will be able to expedite the paydown of its high interest loan from Leucadia National Corp (NYSE:LUK).

It will be interesting to see how FXCM shares trade when US markets open on Tuesday. Beyond the damage caused by the settlement and the reputational damage to FXCM of the CFTC and NFA’s allegation of massive fraud, the question in many investors’ minds will be: Will other national regulators (such as in the UK) follow suit if FXCM’s market making actions were similar in those jurisdictions?

FXCM put out the following press release on the matter:

February 6, 2017

FXCM US Reaches Settlement with NFA and CFTC

FXCM to Exit the U.S.

Sells Accounts to GAIN

FXCM to Pay down Loan

NEW YORK, February 6, 2017– FXCM Inc. (NASDAQ:FXCM) (“FXCM”) today announced simultaneous regulatory settlements with the National Futures Association (“NFA”) and the Commodity Futures Trading Commission (“CFTC”) against its U.S. subsidiary, Forex Capital Markets LLC and certain of its principals. FXCM Holdings, LLC was also named in the CFTC settlement. The named FXCM entities and principals neither admit nor deny the allegations associated with the settlements.  The NFA settlement has no monetary fine, and the CFTC settlement has a $7 million fine.

FXCM will be withdrawing from business in the U.S. and has signed a non-binding letter of intent with GAIN Capital Holdings, Inc. (“GAIN”) under which GAIN would purchase FXCM’s U.S. customer accounts. The transaction is subject to regulatory approval and a definitive agreement. FXCM and GAIN are working to determine the timing for the account transfer and expect to provide further information in that regard in the coming days. In 2016, FXCM’s U.S. business had unaudited net revenues of approximately $48 million and generated an EBITDA loss, but the costs associated with the business will not be transferring to GAIN.  There will be no changes to FXCM customers outside of the United States.

Withdrawing from this business will free approximately $52 million in capital.  Proceeds from the account sale and the release of capital will go toward the further repaying of FXCM’s loan from Leucadia National Corporation.

FXCM will for the interim period continue to service its U.S. customers and to provide top quality trade execution pending the customer-account sale and business withdrawal.  FXCM will also be working diligently to be sure that an account transition to GAIN’s retail brand, FOREX.com, will be orderly, expeditious and seamless.  FXCM wants to express its most sincere thanks to those U.S. customers who have been with FXCM over the years and wish you all the best of luck following this transition.

FXCM wants to stress that these settlements have no impact on any customer of FXCM’s global businesses.  FXCM and its global subsidiaries will continue to provide excellent execution and competitive pricing to its customers overseas through its award-winning technology, customer service and trading tools.

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