Financial, Real Estate, Stock Markets Trends and Current Affairs

Guest post

GFT Forex recently announced its exit from the U.S. forex brokerage community. When combined with the previous departure notices of Advanced Markets and Forex Club, one might surmise that there is a “fire” brewing in the currency trading business, if these three firms represent a significant “smoke signal”, of sorts.

What is the truth behind these obvious misgivings in so popular an investment medium? First, here are the facts. GFT Forex, a London-based brokerage that has been providing service in 120 countries since 1997, announced a week ago that it is selling its U.S. clientele accounts to GAIN Capital LLC.

Glenn Stevens, the CEO for GAIN, stated, “We are pleased to be in a position to offer GFT's U.S.-based retail customers the ability to continue trading forex with an established U.S. regulated firm, with no interruption in service. We will work closely with the team at GFT to ensure a smooth transition of their customers' accounts and assets to our retail division, Forex.com.”

Advanced Markets and Forex Club are a different, but related story. New rules imposed by Dodd-Frank legislation have dictated a basic capital requirement of $20 million, plus 5% more for outstanding customer liabilities, in order to support retail forex trading customers. Both firms fell short and elected to exit retail accounts, re-license, and deal only with institutional clients. This tactic may also backfire, since the new capital rule may soon apply to this arena, as well.

Why are the regulators clamping down after a decade of success and increased popularity? The Commodity Futures Trading Commission (“CFTC”) regulates currency trading in the U.S., and the National Futures Association (“NFA”) has oversight responsibility for the U.S. futures industry. These two entities have performed a yeoman’s task in policing the forex industry for fraud, jailing countless unscrupulous brokers, and educating consumers of the risks confronting them when trading forex.

Regulators tend to give new industries roughly ten years to develop and self-regulate themselves, choosing rather to observe from the sidelines and to maintain order when blatant lawbreaking occurs. High profile arrests have been prosecuted. A portion of funds has been recovered, while the industry matured and consolidations took place. As the clock ticks, however, and after the criminal element has been controlled, the next concern on the table reverts to safety and soundness and the principles they entail.

Dodd-Frank regulations focused on this very area and more. One obvious target was to lower leverage thresholds down to conservative banking standards that were already present. Foreign brokers offer as much as 100% “free” leverage, or even multiples higher, to attract unwitting customers. New rules also forced reporting regimens on foreign brokers, a move to recover taxes on unreported overseas earnings for U.S. citizens. These same rules also forced capital requirements into the mix.

The CFTC regularly publishes a table of forex brokers registered to do business in the United States. As of last December 2011, 35 of the 116 brokers listed had below the $20 million threshold. Both GFT and GAIN were well above these levels, but regulators presented a “new twist” to foreign-based GFT. They expected to see at least the minimum requirement of capital deposited in a U.S. subsidiary, not commingled in foreign bank accounts, where legal access for claims is questionable at best. GFT balked and decided to exit.

GFT is based in London, the center of the foreign exchange market. Over 38% of daily turnover of nearly $4.5 trillion passes through this financial center. New York is a distant second at 18%. Regulators expect accommodation, however, even when the experts are on foreign soil.

Article by Tom Cleveland, market analyst for forextraders.com