Having a hard time getting your forex dealer on the phone? Dealers who cannot meet the new $5 million minimum capitalization requirements by Dec. 21 are scrambling to merge, repositioning themselves as software providers or preparing to go out of business. Firms that offer 100-to-one leverage or greater will need $10 million in capitalization.
In his Sept. 26 congressional testimony, Daniel J. Roth, president and chief executive officer of National Futures Association (NFA), said that members acting as counterparties to retail forex transactions account for less than 1% of NFA’s membership, but that they also account for more than 20% of customer complaints and more than 50% of NFA’s enforcement docket and emergency enforcement actions taken this year. The one characteristic the troubled firms share, according to Roth, is that they are under capitalized.
“I have very mixed feelings about it,” says Michael Stumm, president of Oanda Corporation. He says that NFA is right to be concerned about retail clients and safeguarding their capital. However, with the higher capitalization requirements, the barriers to entry have become higher. “Had this been a rule five years ago, then we wouldn’t be in business today,” he says. “You won’t get a bunch of guys in a garage coming up with an idea that will revolutionize the space. They can’t just go out and become market makers like Oanda did.”
Glenn Stevens, CEO of Gain Capital Group, supports the increase, as well as Roth’s proposed $20 million capital requirement. “At the rate retail investors are coming into the markets, and with the volatility we’ve seen lately, it’s critical that [Forex Dealer Members] are on solid financial footing,” he says, adding that Gain is in active discussions with several other FDMs who will not be able to meet the new capital requirement. In late summer, Gain assumed all customer accounts from Direct Forex when it could no longer meet minimum capitalization requirements.
But a senior manager at an adequately capitalized forex dealer said that within the industry, the fear is that NFA could wreck havoc on retail customers by shutting down undercapitalized firms while not providing adequate support for transferring customer funds to more-solvent firms, as the first result of such an action would be massive employee defections.
Already, firms including Forex Liquidity LLC (FXLQ) and Hamilton Williams LLC have been effectively shut down for failing to maintain minimum capitalization, among other violations. And according to reports filed with NFA by Oct. 31, many other firms do not currently meet the capitalization requirement.
“We worked with the NFA directly on some of these regulations, and overall they strengthen the industry. The number of customers moving into the market is impressive and having some of these smaller players adhere to more stringent requirements is a good thing,” says a spokesperson for GFT Forex Ltd.
