FXDD fined by the CFTC for the second time in two weeks – the real story


Lesson learned? Don’t fight your regulator, even if you think you’re right.

The CFTC (and NFA) seems to have it in for FXDD, unless this is just a coincidence (which we believe it is not). For the second time in just two weeks, the CFTC has announced fines against the leading forex broker for two separate incidents, both of which occurred a long time ago.

Before we begin, an FXDD spokesperson had the following to say:

With regard to the recent CFTC settlement on the issue of undercapitalization, FXDD continuously maintained sufficient capital on a combined basis with its subsidiary, however, for accounting reasons, the two net capital computations needed to be separated in order to meet adjusted net capital rules. As the CFTC notice states: “The Order notes that in settling this matter, the CFTC took into account FXDD’s cooperation and the corrective action it undertook after its deficiencies were discovered.”

So what really happened?

First, the small fine.

Yesterday, the CFTC imposed a not-so-large $275,000 penalty relating to FXDD being (supposedly) undercapitalized at least 18 separate months between November 2010 and December 2012. However, checking the CFTC’s own records for that time period FXDD appears (and likely was) properly capitalized, well above the $20 million minimum capital line.

With one exception, November 2012.

For those who follow LeapRate, you’ll recall that we blew the lid off that one, revealing that the CFTC and the NFA had decided to change the rules as to how subsidiary capital could be counted towards ‘real’ regulatory capital literally overnight — and on the last day of the month (and a Friday) no less. This forced FXDD to be unable to rectify the situation in time before month-end and move money from one subsidiary to another, which is all that was needed to rectify the situation. FXDD did so as soon as they could first thing on Monday morning, but by then it was already December, and they were technically offside for November’s CFTC report.

The negative capital figure for November 2012 which FXDD was essentially forced to report led some observers of the industry to erroneously question FXDD’s capital situation, which was and remains just fine. Again, it does appear as if someone in the regulator’s office is trying to make FXDD look bad.

Now, the larger fine.

The other fine in question was a much larger $2.74 million fine announced September 18, which settled charges of asymmetrical slippage against FXDD, for which FXDD had already previously been forced to place $3.3 million into escrow. (So FXDD should actually come out ahead of this cash-wise, getting back some of their escrowed money). FXDD was one of a number of forex brokers charged with the practice, and the only firm which decided to not initially settle but to proclaim their innocence and fight the CFTC’s charges. Eventually, as we can see, FXDD and the CFTC settled.

What does all this show? Well, it just doesn’t pay to fight your regulator. Right or wrong, your regulator is still going to be there whether you like it or not. And if they say you (and others, in this case) did something wrong and you ought to settle, well — just settle.

One more note. An FXDD spokesperson had the following to say:

With regard to the recent CFTC settlement on the issue of undercapitalization, FXDD continuously maintained sufficient capital on a combined basis with its subsidiary, however, for accounting reasons, the two net capital computations needed to be separated in order to meet adjusted net capital rules. As the CFTC notice states: “The Order notes that in settling this matter, the CFTC took into account FXDD’s cooperation and the corrective action it undertook after its deficiencies were discovered.

For more on the global Forex industry see the LeapRate-Dow Jones Forex Industry Report.

 

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FXDD fined by the CFTC for the second time in two weeks – the real story

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