Thread: CFTC Public Roundtable on PFG

This week the CFTC will be holding a public roundtable to address the concerns of traders in response to the bankruptcies of PFG and MF Global. FXCM would like to announce its own proposals ahead of Thursday's meeting and encourages the public to do so as well.

Proposals to Bring Full Market Transparency and Accountability to the Futures/Forex Industry


1) Require All FCM’s to Publicly Publish Their Financials Once a Quarter:
Currently, the CFTC publishes monthly “Net Capital” reports that disclose to the public how much money a Futures Commission Merchant has set aside in capital. However, that report provides very little insight into how well the company is doing financially. By requiring FCM’s to publish their audited financials the trading public will know how much risk they are taking with each firm since investors will be able to weigh the liabilities along with the excess capital that a Futures Commission Merchant has.

Furthermore, the published financial statement should include everything (i.e. holding company’s financials) since what happens to other subsidiaries of the company can easily effect the regulated FCM. Each company should be required to provide a link to its financials on its own homepage so that the public can do its proper due diligence.

Too often, those FCM’s that are teetering on the edge of bankruptcy lure customers in by offering unsustainable gimmicks (dirt cheap commissions, account opening bonuses) that temporarily puts off the inevitable. Customers should be aware of the perilous finances of those FCM’s that would offer these kinds of gimmicks before opening an account with such a firm. PFG Best was a classic example of a firm that used such gimmicks as they routinely low balled their competitors with uneconomical discounts that no reputable, legally compliant firm could match.

2) Require all FCM’s to Employ a Top Ten Accounting Firm:
There need to be much higher accounting standards than currently exist in the FCM world. The Platt Group publishes an annual ranking of public accounting firms that could be used by FCM’s. Whether it is top 10 or top 25, the main point is that FCM’s must use a nationally recognized and respected accounting firm that could apply the same tough standards to FCM’s that publicly traded companies must meet.

While no one proposal will guarantee that a future FCM will not fail, these proposals will enhance the public’s due diligence capabilities by bringing greater market transparency and accountability into the world of futures/forex trading.

Traders can show their support for these proposals by leaving comments with the CFTC using the following web page:

http://comments.cftc.gov/PublicComme...m.aspx?id=1250



Charles Delano
Director of Government Affairs
FXCM

I don't think requiring an FCM to post its financials is fair. I understand that FXCM being public would love to even the playing field and have everyone post their financials but that is one of the advantages of being private.. you get to keep some things internal. As for the Big 10 account firms, I fully agree. Firms should be required to be audited by someone who knows what they are doing, not the "best deal" available that many firms seek. Further, I think an independant auditer from one of these firms should either be brought with the NFA for their yearly audits at FCM's or audit the NFA's findings.

Originally Posted by bseegers

I don't think requiring an FCM to post its financials is fair. I understand that FXCM being public would love to even the playing field and have everyone post their financials but that is one of the advantages of being private.. you get to keep some things internal.

Hi bseegers,

In regards to disclosure- under normal circumstances we would agree with you. However, unlike your average, private business; FCM's and forex dealers are holding customer funds in trust. And that trust has been continually violated the last twelve months. We don't believe it is too much to ask that those firms who are accepting customer deposits disclose to them exactly how much risk they are taking on when they send in their funds.

Last Thursday the CFTC held a public hearing to determine what steps should be taken to repair the damage done by the bankruptcies of PFG and MF Global. I’d like to share with everyone some of the highlights of the hearing:

Better Accounting Standards: There was much discussion of auditing standards for both Regulators of FCM’s and the CPA’s who audit FCM’s. There was general agreement these standards need to be raised. FXCM believes FCM’s should be required to use a top accounting firm to avoid the kind of accounting issues that plagued PFG.

Additional Disclosure Requirements: An extensive discussion on FCM transparency was held and it is clear that FCM’s are going to have to make more disclosures of their books to regulators and to the public. The question is how much is to be disclosed? On the one hand there was testimony from FCM’s like Vision who publish their balance sheet on their website and on the other hand were those who were concerned that too much disclosure could lead to possible “bank runs” by investors. FXCM believes investors should be able to see a company’s audited financial statement once a quarter. Too many investors are forced to fly blind when they choose a Futures Commission Merchant or Forex Dealer. No trader should be subjected to this kind of risk post-PFG.

Insurance: Commissioner Bart Chilton released his proposal for a futures insurance fund on the same day of the hearing. Towards the end of the Roundtable the topic turned to insurance and John Roe of the Commodity Customer Coalition once again made a forceful case for a fully insured fund for the futures industry. As of now, Commissioner Chilton’s proposal does not include retail forex, but there is no reason that it shouldn’t. FXCM supports insurance for the futures/forex industry.

The CFTC will now deliberate into October before announcing their proposals. We encourage everyone to comment using the link below:

http://comments.cftc.gov/PublicComme...m.aspx?id=1250

Just read a very interesting comment letter to the CFTC by James Gellert of Rapid Ratings:

http://comments.cftc.gov/PublicComme...46&SearchText=

Mr. Gellert makes the following comment about the benefits of FCM’s being required to disclose their audited financials:

Would Mr. Wasendorf have been as ready to invent financials if his customers had demanded full, audited balance sheets and income statements all along? Would Mr. Wasendorf have been able to compose such reports with sufficient skill as to withstand rigorous third-party examination over twenty years? Rapid Ratings recalls that, by applying large numbers of interrelated calculations to the published reports of Enron, our firm was able to detect vivid inefficiencies entirely inconsistent with the investment grade ratings that Enron enjoyed from the larger rating agencies – inefficiencies that later turned out to have been the result of commingling accurate and fabricated reporting lines.

Mr. Gellert’s point about the difficulty of forging financial documents using the kind of standards that publicly traded companies use is well taken. Had PFG been forced to use such standards Wasendorf’s scam would have likely been caught long before July of 2012. Furthermore, ratings agencies like Rapid could break down the data in a manner that average investors could more easily understand. Although, we disagree that only ratings agencies be allowed to see such data. We believe any trader who opens an account with a FCM or Forex Dealer should be able to judge for themselves a firm’s financial health.

You can make your feelings known to CFTC by posting comments here:
http://comments.cftc.gov/PublicComme...m.aspx?id=1250

Two new developments in the last few days indicate that regulators are trying to get out in front of the safety of funds crisis that has gripped the futures/forex industry. However, these reforms may not extend to the retail forex market.

On Friday the National Futures Association approved a new rule requiring all Futures Commission Merchants to grant real-time, online access to FCM bank accounts. This rule is in response to Russ Wasendorf’s bank statement forgeries which had fooled regulators for 20 years. The language specifically references FCM’s and we are currently checking to see if Retail Foreign Exchange Dealers (RFEDs) will have to comply with the rule as well. FXCM’s position is that RFEDs need to be more transparent, which is why we also support a rule requiring all FCMs/RFEDs to fully disclosure their financials to the trading public.

The second development came last Thursday at a meeting in Chicago, as reported by the WSJ, in which the CME was reportedly “softening” its opposition to an insurance fund for futures traders. Again, however, no mention of extending such protections to retail forex traders was made.

Futures Industry Leaders Discuss Insurance Fund - WSJ.com

While both of these development are positive, the negative aspect to them is that retail forex may very well be over looked. This is why we are strongly encouraging the trading public to contact the CFTC and leave comments about the need to further protect retail forex traders. Traders can leave comments using the link below:

http://comments.cftc.gov/PublicComme...m.aspx?id=1250

Reading through the comments at the CFTC a number of good points have been brought up regarding the need for additional protections.

Alex Winters made the following comment to the CFTC: http://comments.cftc.gov/PublicComme...21&SearchText=

Forex traders should be considered in these rulings. PFG and MF Global hurt both Forex and Futures traders during their collapse. I submit that any protections offered to futures traders also be extended to forex also. While insurance would be the best protection the emerging forex industry shares the same (and more) insecurities. For this industry to survive and prosper we must be able to trust that brokers that hold our funds are solvent especially since past CFTC rulings (50:1 leverage) require that we deposit even more of our money with brokers when we have no way auditing their financial health.

The CFTC's requirement a few years ago that traders put up more margin to trade retail forex leads to the logical conclusion that regulators put in additional protections (disclosure of company financials, better accounting standards, insurance) since retail forex traders now have more capital at risk. This is a pretty powerful argument and I would encourage traders who leave comments with the CFTC to make it.

The CFTC has recently closed the comment period that was associated with the Public Roundtable on PFG:

http://comments.cftc.gov/PublicComme...t.aspx?id=1250

This could mean that CFTC is nearing a decision and is about to announce their planned reforms. Comments and suggestions can still be sent to the CFTC however by emailing secretary@cftc.gov.

FXCM is recommending that all FCM’s and forex dealers publicly publish their financials once a quarter and employ a top ten accounting firm. We encourage retail forex traders to share these and other suggestions with regulators by emailing them directly. Thousands of PFG customers traded retail forex with PFG and their voices should be included in any discussion designed to increase customer protections for NFA regulated firms. Furthermore, providing insurance to futures traders and not forex traders would be a further insult to injury for those currency traders at PFG and any future forex traders caught up in an insolvency. Make your voice heard today.

We've been told by the NFA that the instant "view only" bank account access that FCM's must now grant to the NFA is not applicable to Forex Dealers. In short, NFA is not requiring forex dealers provide the same instant bank account access that Futures Commission Merchants provide. This is the clearest sign yet that regulators are not planning to extend any additional customer funds protections to the retail forex community.

The stated reason is that since retail forex funds are not legally required to be "segregated" they are not in the same category as the seg funds that FCM's hold on deposit. This has long been an issue involving the Commodity Exchange Act which grants seg funds to on-exchange contracts but does not have a word to say about retail foreign exchange because nobody was trading forex online in the 1970's when these laws were passed.

This logic will likely be used for additional proposals such as insurance where we can now expect retail forex to be excluded as well. This is why financial disclosure for retail forex firms becomes even more important. With retail forex dealers not being included in the safety of funds discussion currency traders are now solely left to their own due diligence when it comes to picking a broker.

We still encourage you to email secretary@cftc.gov to let regulators know that retail forex should not be excluded. If no one speaks up then regulators can assume that retail forex need not be a priority.

I've been asked why retail forex does not have seg funds protection and so I wanted to pass along this brief regulatory history of the retail foreign exchange market:

In 2001 retail online currency trading was regulated for the first time with the passage of the Commodities Futures Modernization Act of 2000 (“CFMA”). This law provided that any non-bank firm making a market in retail FX transactions could be registered and licensed by the Commodities Futures Trading Commission (“CFTC”). This law was a step in the right direction but it did not in any way grant customers trading FX with these firms any funds protection in the event of bankruptcy as is common in exchange traded markets such as equities and futures.

In particular, the CFMA did not make any adjustments to the CFTC’s “segregation rule.” The segregation rule stipulates that all client funds deposited for trading domestic, on exchange futures or options on futuresbe kept segregated from all company funds and that in the event of bankruptcy the customer’s funds are legally segregated from creditors and must be returned to the clients.

In May 2008, Congress amended the Commodity Exchange Act (“CEA”) and created an entirely new registration category, the Retail Foreign Exchange Dealer (“RFED”), for forex dealers operating in the U.S. Neither at that time nor two years later when Congress enacted sweeping financial sector reform legislation with the Dodd-Frank Reform and Consumer Protection Act of 2010 were provisions included that could have provided for RFEDs to segregate funds for the protection of retail FX customers

The CFTC explained the reason for not including segregation of funds for retail FX as follows:

http://www.cftc.gov/ucm/groups/publi...010-21729a.pdf


“… Several commenters maintained that the Commission should require segregation of customer funds by counterparties in order to provide some protection in the event of a counterparty insolvency. The Commission’s segregation requirements with regard to futures flow from Section 4d of the Act which, generally speaking, requires that customer property for trading commodity contracts be kept apart, or segregated, from the FCM’s own funds. However, as noted in the Commission’s proposing release, a segregated funds regime cannot be replicated in the context of off-exchange retail forex trading. Unlike segregation of customer funds deposited for futures trading, under the relevant provisions of the Bankruptcy Code, such amounts held in connection with retail forex trading would not receive any preferential treatment to unsecured creditors in bankruptcy.”

This hiccup with the bankruptcy code is what is currently holding up everything from seg funds protection to insurance. More in my next post.

Next Wednesday morning the CFTC will be holding a meeting where they are expected to announce additional post-PFG customer protections. As I discussed in my previous post the absence of any language pertaining to off-exchange, retail forex transactions in the bankruptcy code is the given reason cited by regulators as to why no additional protections for retail forex traders can be put in place. It will likely also be the reason that retail forex will be excluded from any insurance scheme. We shall see on Wednesday.

However, this would not preclude regulators from requiring FCM's/RFED's from disclosing their financials on a quarterly basis or requiring tougher accounting standards. In fact, absent insurance protection or seg funds these may be the only protections that can be offered to the retail forex community. Since customers cannot rely on clear legal language to protect them in the event of bankruptcy it becomes even more imperative that customers be able to see for themselves just how sturdy the retail forex broker they are doing business with is. Comments can still be submitted to CFTC by emailing secretary@cftc.gov

Last week the Trustee of PFG's estate announced a series of limited distributions to customers of the bankrupt firm. Of interest to retail forex traders is that the estate is not making any current distributions to PFG customers who were trading off-exchange forex:

http://www.omnimgt.com/CMSVol/CMSDoc...333616_147.pdf


Quote:
“The Forex Customers and the Metals Customers, however, do not hold claims against the Debtor on account of "commodity contracts" and therefore, are not "customers" under § 761(9) of the Bankruptcy Code and the Part 190 Rules. Accordingly, in accordance with subchapter IV and the Part 190 Rules, the distributions requested under the Motion, discussed below, will apply solely to the Futures Customers. Forex Customers and Metals Customers will not be included in such distributions and their claims will be addressed separately as part of the case.

The way the law is written the trustee is justified in putting futures customers first. This is why it has become urgent that regulators take additional steps to bring transparecy to the futures/forex industry so that customers can have a look at their broker's finances in order to weigh the risks invovled before putting funds on deposit with them. Since the law is not designed to currently protect forex investors, then traders need to protect themselves. This starts with granting traders the ability to conduct greater due diligence. If regulators can mandate that brokers disclose profitability ratios surely they can also mandate greater financial disclosure.

CFTC to announce initial recommendations this week. Contact secretary@cftc.gov with your thoughts.

http://www.omnimgt.com/CMSVol/CMSDoc...333616_147.pdf

The URL in the post above is broken. I'm very interested to understand why the current bankruptcy laws exclude FX and metals customers. Is the money being distributed to futures customers from PFG assets or some type of insurance?

Originally Posted by aaceofspades

http://www.omnimgt.com/CMSVol/CMSDoc...333616_147.pdf

The URL in the post above is broken. I'm very interested to understand why the current bankruptcy laws exclude FX and metals customers. Is the money being distributed to futures customers from PFG assets or some type of insurance?

Try this link: http://www.omnimgt.com/CMSVol/CMSDoc...333616_147.pdf

No money has yet been distributed to PFG's customers. There is no insurance involved so customers basically have to get whatever is left in PFG's seg accounts.

As regulators continue to investigate PFG news is coming out showing that the futures firm had been losing money for years:

PFGBest In More Trouble As Liabilities Outweigh Assets | ValueWalk


QUOTE:
"Its financial statement submitted to the court, indicated that the business has been going down since 2010. The company suffered $2.7 million in gross income losses in 2010, $1.2 million in losses in 2011, and $259,000 losses during the six month period of the current fiscal year."

PFG had recorded three straight years of losses. And yet they had just moved into an $18 million glass and steel office complex in Iowa boasting some of the most luxurious office amenities imaginable. But because PFG never had to disclose their losses they were able to give customers the impression that the firm was healthy and growing, when in fact it was sick and contracting. Customers should be aware of this before they open an account. Particularly since there is no insurance for futures or forex.

The CFTC postponed their vote on additional customer protections this week giving traders a little more time to comment.