CFTC Charges FXCM (FXCM) with Undercapitalization

August 18, 2016 4:47 PM EDT

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The U.S. Commodity Futures Trading Commission (CFTC) filed a civil enforcement action in the U.S. District Court for the Southern District of New York against Forex Capital Markets, LLC (NYSE: FXCM), charging FXCM with undercapitalization, failure to timely report its undercapitalization violation, and guaranteeing against customer losses. FXCM, with headquarters in New York, New York, is registered with the CFTC as a Retail Foreign Exchange Dealer (RFED).

The CFTC Complaint, filed on August 18, 2016, alleges that FXCM, as an RFED in the business of offering or engaging in retail off-exchange foreign currency transactions, was required to maintain adjusted net capital of approximately $25 million on January 15, 2016. However, the Complaint alleges that on that day FXCM admitted it had a shortfall of at least $200 million under its adjusted net capital requirement, meaning FXCM had liabilities exceeding its assets by approximately $175 million.

As alleged in the Complaint, the capital shortfall followed the removal of the 1.2000 EUR/CHF fixed exchange rate, also known as the “peg,” and the drop of the EUR/CHF rate to 1.1659. FXCM’s systems were not designed to prevent or diminish the effects of such a market event, leading to increased losses. FXCM’s capital shortfall was not resolved until January 16, 2015, when FXCM sought and obtained a loan of approximately $279 million from a large conglomerate holding company, according to the Complaint.

The Complaint also alleges that FXCM failed to immediately notify the CFTC when it knew or should have known that its adjusted net capital was less than that required under the applicable CFTC regulation and that it was, therefore, undercapitalized. In fact, FXCM never affirmatively gave notice to the CFTC, and it was only after the National Futures Association (NFA) and the CFTC initiated contact that FXCM provided notice of its capital deficiency, according to the Complaint.

The Complaint also alleges that FXCM had an advertised policy of zeroing out negative customer balances, effectively guaranteeing customers against loss in contravention of CFTC regulations. FXCM’s policy of zeroing out negative customer balances was memorialized in FXCM’s customer account opening documents, which had a provision stating that if the customer incurred a negative balance through trading activity FXCM would credit the customer account with the amount of the negative balance, according to the Complaint.

In its request for relief against FXCM, the CFTC seeks civil monetary penalties and a permanent injunction against future violations of federal commodities laws, as charged.

The CFTC thanks the NFA for its assistance.

CFTC Division of Enforcement staff members responsible for this case are Saadeh Al-Jurf, Luke Marsh, Dmitriy Vilenskiy, and Paul G. Hayeck.



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