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It seems the US regulators may be doing forex brokerage Forex Capital Markets [NASDAQ:FXCM], a favor by giving it the boot out of the country, as the broker’s US operations generate a large negative income. Days after it announced it is exiting the US, FXCM published additional information regarding the costs associated with its retail operations.
According to the data, FXCM generated a net loss of $13.9 million for the nine months, ended 30 September, 2016. Its consolidated net income amounted to $126 million, which means that if the US activities were excluded from the count, the brokerage’s financial performance would have jumped to nearly $140 million.
FXCM is the top broker in the US and its operations there accounted for 19% of its revenue generated from retail operations during the said period. However, it turns out the broker’s US business is a loss-making machine and exiting the market would significantly improve its overall financial performance.
Net income (loss)
Bad debt recovery
Gain on derivative liabilities – Letter & Credit Agreement
Interest on borrowings
Tax provision (benefit)
“Even without its US customers, FXCM remains one of the largest global retail foreign exchange brokers, and FXCM anticipates that the increased focus on serving its international global customer base will drive growth and continued profitability improvement,” the broker said in a notice.
It became clear last week that FXCM is exiting the US market after its local arm Forex Capital Markets LLC got banned by the US National Futures Association (NFA) and agreed to withdraw from registration with the US Commodity Futures Trading Commission (CFTC) and never to seek to register with it. The broker was charged with taking positions against customers, concealing that a key market maker was tightly related to the broker, and misrepresenting its “No Dealing Desk” platform as providing no conflict of interest with customers.
FXCM’s US client sale to further improve its financials
Also last week, FXCM entered into an agreement with its main competitor in the US, Gain Capital [NYSE:GCAP], to sell its US clients base. The broker noted that none of its costs will be transferring to Gain Capital and it expects significant cost savings from the wind down of its US retail forex operations.
It will receive either $250 or $500 for each client, depending on the trading activity. With the sale of its US operations, FXCM will further improve its financial situation as it will use the proceeds to partially finance its outstanding debt to US lender Leucadia National Corp.
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 at the time. This put the broker in breach of the regulatory capital requirements and it had to fill in the gap. According to the latest information available, FXCM has made loan repayments of $157 million to Leucadia with $153 million outstanding.
FXCM Group operates via several subsidiaries – US-regulated Forex Capital Markets LLC, UK-licensed Forex Capital Markets Ltd., and Australia-regulated FXCM Australia Pty. Ltd., as well as introducing broker (IB) partners. It is 50.1% majority owned by FXCM Inc. The rest of the group moved to the hands of US lender Leucadia National Corporation in 2016.