The Latest Forex Broker Financial Situation
The December 31st, 2007 FCM report was released from the CFTC and processed on http://www.brokerontop.com today. Some notable mid-cap Forex brokers who remain in financial shape based on Excess Net Capital are:
- Oanda’s excess net capital decreased 1.85% from the previous month to 149 million dollars.
- FXCM’s excess net capital decreased marginally from the previous month to 61 million dollars.
- Gain Capital (Forex.com) excess net capital decreased almost 2% from the previous month to just over 44 million dollars.
- Interbank FX excess net capital decreased by over 40% from the previous month to 15.7 million dollars.
- FX Solutions excess net capital decreased by 49% from the previous month to 13 million dollars.
- GFS Forex and Futures increased excess net capital by 248% to just over 9 million dollars.
- CMS Forex increased excess net capital by over 22% to just under 9 million dollars.
- Alpari (US) had excess net capital decrease by over 44% to just over 3 million dollars.
- Easy Forex had excess net capital decrease by over 48% to 2.6 million dollars.
These numbers don’t tell the full story of any FCM’s financial health. Perform your own due diligence to try to determine if a forex firm is financially stable. I prefer the mid-cap brokers but we all know what happened to Refco a couple of years ago so you never know. Even though Refco seemed like they were financially stable, if the company is hiding bad debt and performing creative accounting, your money could be gone forever.
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Did Brokers Prepare For NFA Requirement Changes?
I guess we'll find out sooner or later but Forexds has an interesting comment regarding the whole thing:
"I know that many of the small FCM fishes have become IB's to established FCM's in December or sold their books to the likes of FXCM. But ALL of the names you mention in your note have posted the higher capital (I know for a fact that MB Trading and FX Club have). Alpari is a new comer to the US, but very well established in Eastern Europe. The higher net cap requirement of $10m is no surprise to FCM and they've had months to prepare and get the capital in order. You wont get the DEC data from the CFTC site until 6 weeks from now, though."
For those of you that aren't versed in the common acronyms you see in forex, FCMs are Futures Commission Merchants. IB's are introducing brokers (defined as a futures broker who has a direct relationship with a client, but delegates the work of
the floor operation and trade execution to another futures merchant.) Some IB's may be fund managers and some could just be considered salespeople, "introducing" traders to a larger broker and taking a commission and a cut of the spread.
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Forex Broker Financial Data
I've perviously mentioned that the CFTC release reports each month with financial information for Futures Commission Merchants which include Forex brokers. Within this report are 2 important columns. The first is the Adjusted Net Capital which is the adjusted net worth of a broker (FCM) after adjustments for certain deductions. The second is the net capital requirement which are funds that the firm must possess in order to continue to operate. I sent an email to the CFTC to find out a little more information on the relationship between the two columns. One question that I asked was not directly answered which was, "How can the data best be interpretated to conclude the financial health of a broker?" The good thing was I did receive the following response from an attorney at the Division of Clearing and Intermediary Oversight.
Your October 4, 2006 e-mail to the
Division of Clearing and Intermediary Oversight (“DCIO”) has been
forwarded to me for response. Please be advised that there is extensive
information about futures commission merchants (“FCMs”) and FOREX
on the website of the National Futures Association, a registered futures
association whose members include FCMs. For example, the NFA website
includes a section on the financial requirements for FCMs, and also has a section
that addresses FOREX. There is a link to the NFA website on the
CFTC’s website, and I have inserted the same link at the end of this
e-mail.
Link
to NFA website:
Shortcut to: http://www.nfa.futures.org/compliance/issues_fcm_ib.asp
Your e-mail also asked specifically about
the relationship between a firm’s “adjusted net capital” and
its “adjusted net capital requirement.” CFTC Regulation
1.17(a) requires each FCM to maintain a minimum amount of adjusted net capital,
which in general is the greatest
of the following:
(1) $250,000;
(2) the sum of 8% of the FCM’s total
customer risk maintenance margin and 4% of its total noncustomer risk
maintenance margin;
(3) if the FCM is a member of a registered
futures association, the minimum capital amount required by the association
(currently, NFA is the only such association, and its minimum capital
requirements for members include several specific requirements for firms
engaged in FOREX); or
(4) if the FCM is also registered as a securities
broker or dealer, the amount of net capital required by Rule 15c3-1(a) of the
U.S. Securities and Exchange Commission.
The term “adjusted net
capital” is defined in CFTC Regulation 1.17(c), and generally refers to
an FCM’s net worth after adjustments for certain reductions required by
CFTC regulations. For your convenience, I have inserted a link to
Regulation 1.17 at the end of this e-mail.
If you have additional questions, please
feel free to call me at the phone number listed below. If I am out of the
office, you may call another DCIO attorney….
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