FXCM loses US authorization over defraud, mulls selling clients to peer Gain Capital

FXCM loses US authorization over defraud, mulls selling clients to peer Gain Capital

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US forex broker giant Forex Capital Markets (NASDAQ:FXCM) is in the process of exiting the US market and is considering to sell its US retail client base to peer Gain Capital [NYSE:GCAP], the two parties involved reported on Tuesday. Forex Capital Markets LLC, the broker’s US arm, has been banned by the US National Futures Association (NFA) and has agreed to withdraw from registration with the US Commodity Futures Trading Commission (CFTC) and never to seek to register with it.

This means FXCM is no longer authorized in the country. The decision will become effective on 21 February  and FXCM will withdraw from NFA membership within 15 days of that date.

In addition, FXCM and its principals have to pay $7 million civil monetary penalty as part of a settlement with the CFTC.

According to the CFTC and NFA’s findings, between September 2009 through at least 2014 FXCM engaged in numerous false and misleading activities with the intend to solicit retail forex customers. It concealing its relationship with its most important market maker and misrepresented that its “No Dealing Desk” platform had no conflicts of interest with its customers. FXCM willfully made false statements to the NFA in order to conceal its role in the creation of its principal market maker as well as the fact that the market maker’s owner had been an FXCM employee and managing director. The broker also claimed in marketing campaigns client “retail customers’ profits or losses would have no impact on FXCM’s bottom line, because FXCM’s role in the customers’ trades was merely that of a credit intermediary”. All these activities were to FXCM’s benefit and to the detriment of its customers.

The NFA has also banned three FXCM principals – CEO Dror Niv, managing director William Ahdout, and Ornit Niv, from membership and from acting as a principal of an NFA Member.

“The named FXCM entities and principals neither admit nor deny the allegations associated with the settlements,” FXCM said in a statement.

FXCM’s clients seen to transfer to Gain Capital by end-Feb, funds to go for Leucadia loan repayment

The two entities have signed a non-binding letter of intent, under which Gain Capital will acquire FXCM’s clients in the US market. The accounts will be transferred to the Forex.com brand, which is expected to occur prior to the end of February. The costs associated with the business operations are not part of the two entities’ agreement. The transaction is subject to a definitive agreement and regulatory approval.

For the time being, FXCM said it would continue to service its US customers until the sale and business withdrawal are finalized. It will use the proceeds to partly finance a loan repayment to US-based lender Leucadia National Corp.

“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,” the broker’s statement read.

In 2016, FXCM’s US business had unaudited net revenues of approximately $48 million and generated an EBITDA, according to data provided by the broker itself.

In September last year, FXCM sold its news and research service DailyFX to UK-based brokerage IG Group for $40.0 million to contribute to the loan repayment. At the time, the broker said it had made, together with the DailyFX sale proceeds, loan repayments of $157 million to Leucadia with $153 million outstanding. Since then, no relevant information about the status of the loan has been provided.

FXCM drew a $300 million cash credit from Leucadia in early 2015 after its clients experienced heavy losses and generated negative equity balances of combined some $225 million as a result of the Swiss franc-related crisis from January that year. This put the broker in breach of the regulatory capital requirements and it had to fill in the gap. It also sold its subsidiaries FXCM Japan Securities and FXCM Asia, aka FXCM Hong Kong, to its Japanese peer Rakuten Securities. In March 2016, the broker and the lender agreed on a one-year extension of the credit agreement to January 2018.

US retail forex market shrinks to just four participants

FXCM is the largest forex broker in the US in terms of retail forex deposits. Gain Capital used to hold the second place, but it was outperformed by Oanda, which acquired in March 2016 the US forex clients of peer IBFX after it exited the market.

Now that FXCM is also exiting, there are just four retail forex brokers left – Gain Capital, which will become a market leader if the FXCM deal follows through, Oanda, Interactive Brokers and TD Ameritrade Futures&Forex, the last one of which commenced offering forex trading services in May 2016, shortly after it obtained the last needed authorization documents.

The US forex market has been experiencing a downfall in the recent months. Harsh regulatory restrictions cause brokers to experience difficulties. Phillip Capital and IBFX both ceased operations in the US earlier in 2016 and. Meanwhile, Interactive Brokers, discontinued offering leveraged forex trading services to US retail clients with less than $10 million in deposited assets as of 1 September, also due to regulatory requirements.


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