A couple of recent and similar moves by two US regulators, the FDIC (or Federal Deposit Insurance Corporation) and the OCC (or Office of the Comptroller of the Currency), went largely unnoticed in the Forex industry, and in our view were somewhat misinterpreted by those who did notice. However, these moves spoke volumes to us about future competition in the Forex business – in particular about the potential entry of several large US banks into the business.
First, a little background. The OCC is technically the regulator of all US banks, and supervisor of the agencies of foreign banks in the US. The FDIC is not technically a regulator of US banks, but by virtue of its role organizing and managing deposit insurance in the US it too sets certain rules for the banks and is responsible for inspecting the soundness of the banks.
In early May both the OCC and FDIC introduced rules allowing their regulated / supervised institutions (i.e. US banks) to offer leveraged Forex trading to clients, with very similar rules (e.g. 50:1 max leverage on Forex major pairs, 20:1 on others…) to those already put in place by the NFA and CFTC, which regulate the existing non-bank Forex firms (such as FXCM and Gain Capital). There were some small subtle differences between the OCC’s and FDIC’s proposals, as pointed out by Skadden Arps in an interesting legal-focused summary piece, such as differences in proposed dispute resolution – the FDIC prohibits pre-dispute arbitration agreements, while the OCC’s proposal allows them.
As the OCC’s and FDIC’s proposals basically mirrored the existing NFA rules, not much attention was paid to their announcements. However, it has been indicated to us by leading Forex attorney Felix Shipkevich (thanks, Felix) that both the FDIC and OCC rarely introduce rules without a reason or need, such as behind-the-scenes lobbying by its member institutions which would like to enter a market. And that is the key here – our “reading between the lines” would indicate that there are likely several (major?) US banks which would like to look at launching online Forex businesses, leading to more potential competition in the US market and beyond.
To date, among US banks only Citigroup, via CitiFX Pro, offers online margin Forex trading. (The FDIC actually noted in its proposal that only one of its supervised institutions currently offers such trading, but did not mention Citigroup by name). Recently we have seen some mixed messages among US and foreign banks, with Deutsche Bank shuttering dbFX (selling its clients to Gain Capital) while news surfaced that Barclays and TD Waterhouse were getting into the business, via white labels (both of Saxo Bank). At the same time the US has seen the planned entry of other players, most notably TradeStation (ending its white label agreement with Gain Capital in order to go it alone) and optionsXpress, which itself is in process of being acquired by Charles Schwab for $1 billion.
(Other reports that Deutsche Bank was exiting its dbFX business because as a foreign bank it was “caught” by these new rules, as well as the Dodd-Frank Act repercussions, were we believe erroneous. Indeed, several foreign banks with no US physical presence or operations will need to stop taking US Forex clients as of July 21, 2011. However, Deutsche Bank has significant operations as a fully licensed US bank, and had long ago consolidated a leading position in US banking with its $10 billion acquisition of Bankers Trust in 1998. Interestingly, Deutsche Bank today is one of the largest foreign-based employers in New York City.)
With firms such as Charles Schwab and large US banks possibly looking to make significant moves in the business, it looks like the competitive landscape in online Forex is going to get somewhat more crowded – at least in the US. For this reason, we believe that the existing firms will continue to focus abroad for growth, most notably in the Far East. As we wrote a couple of weeks ago, it was clear from FXCM and Gain Capital’s Q1 reports that this is already happening – for example in Q1-2011 Asia represented 48% of Gain’s retail volume, up from just 24% last year.