The failure of firms operating over-the-counter cash forex platforms like Refco’s unregulated forex unit as opposed to its futures brokerage revealed a huge problem in the OTC forex industry: customer funds had no protection, unlike currency futures, which have segregated fund protection.
With this as a concern to OTC forex customers, Citibank’s retail forex arm developed a remedy for protecting retail OTC forex clients through its CitiFX Pro platform. In February, it began participating in the Federal Deposit Insurance Corporation’s (FDIC) Transaction Account Guarantee Program to protect retail forex customers. Under the program, all Citibank U.S. non-interest bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account if the bank becomes insolvent.
As a subsidiary of Citigroup, the Citi platform is eligible for FDIC insurance, which is offered only to banks. “Clients looking to transact FX feel comfortable dealing with a large global institution and the additional level of security created by government insurance is very helpful. Clients – especially in the current atmosphere – are seeking a greater sense of comfort with their counterparty and with the security of their funds,” says Sanjay Madgavkar, global head of FX margin trading at Citi.
CitiFX Pro has FDIC protection through Dec. 31, 2009, when it will need to renew. Clients that have margin funds in U.S. dollars will receive FDIC insurance. The coverage is automatic.
But some say the U.S. government should not be protecting customers utilizing such highly leveraged trading products. “This really isn’t the environment that the government should be protecting customer accounts that are purposely going into highly leveraged derivatives. I don’t believe the FDIC really understands what they’re offering, and if they do, that’s a new risk to the FDIC,” says Bruce Pollack, head of the forex division at PFG Best. However, the FDIC guarantee does not cover trading losses in a customer’s account.
Similar protection is offered by other governments. For instance, dbFX customers who are not financial institutions and trading with Deutsche Bank AG London, a full branch of Deutsche Bank AG Germany, are covered by the Deposit Protection Fund of the Association of German Banks, notes Betsy Waters, global director of dbFX. The current protection is up to one billion euros per depositor.