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FXCM gets $7 mln fine from CFTC, sells US business to Gain Capital

Feb 07 2017
By
Jonathan Smith

In a surprising twist of regulatory fate, FXCM – the largest US retail forex broker – got banned from doing business there and was fined $7 million by the CFTC, all in the fateful afternoon of February 6, 2017. The reason: misleading customers and regulators.

 
According to a statement from FXCM's main competitor – Gain Capital – it is in talks to acquire FXCM's retail clients and transfer them to its retail platform Forex.com by the end of February. 
 
Additionally, the National Futures Association (NFA) has barred FXCM and its founders and principals Dror Niv, William Ahdout, and Ornit Niv from membership and from acting as a principal of an NFA Member. This, in essence means that FXCM cannot do business in the US any longer. 
 
According to NFA's statement, the decision of its Business Conduct Committee (BCC), is based on a Complaint issued by the BCC and a settlement offer submitted by FXCM, Dror Niv, Ahdout and Ornit Niv. 
 
The NFA and CFTC found that between September 2009 through at least 2014 FXCM has been misleading its retail forex clients by concealing its relationship with its most important market maker and by misrepresenting that its “No Dealing Desk” platform had no conflicts of interest with its customers. FXCM has also been telling its customers that their profits or losses would have no impact on FXCM’s bottom line, because FXCM’s role in the customers’ trades was merely that of a credit intermediary. The broker was also saying the risk would be borne by banks and other independent “market makers” that provided liquidity to the platform. 
 
The two regulators, however, found that FXCM and its principals had an undisclosed interest in the market maker that consistently “won” the largest share of FXCM’s trading volume – and thus was taking positions opposite FXCM’s retail customers.  The broker has also devised a trading algorithm system that was replacing and competing with the independent market makers on FXCM’s “No Dealing Desk” platform. Eventually the system was spun off as a separate company that rebated to FXCM $77 million between 2010 and 2014.
 
Worse still, Dror Niv and Ahdout didn't inform NFA about all this. The company principals also failed to supervise properly the other FXCM employees. 
 
The NFA ban comes into effect on February 21, 2017, and FXCM will withdraw from NFA membership within 15 days of February 21, unless this 15 day period is extended by the BCC.
 
On top of this ban and the $7 million fine, FXCM, Niv, and Ahdout are also prohibited from registering with the CFTC, acting in exempt capacities or acting as principals, agents, officers or employees of registrants, the CFTC said.
 
This is not the first offense of FXCM and definitely not the first time it got a slap on the wrist, but this time it will be the last one. In 2011, FXCM was charged by NFA with engaging in asymmetrical price slippage practices and ordered to pay a $2 million monetary sanction. The broker was also warned not engage in the types of deceptive and abusive practices for which it got punished in 2017. 
 
Following the surprising development, Gain Capital said it has signed a non-binding letter of intent to acquire the client base of FXCM's US operations. Under the agreement, FXCM's clients will be transferred to Gain Capital's retail brand Forex.com. It is expected that this will happen till the end of February. Additional information about the timing of the transfer will be provided by Gain Caiptal when the final agreement is reached.
 
Gain Capital is one of the major retail forex and CFD brokers in the world. It is currently regulated in eight jurisdictions, with approximately 140,000 customers and over $1.5 billion in assets.  In addition to its US regulated retail forex business, Gain operates regulated retail trading operations under the brands Forex.com and City Index in the United Kingdom, Japan, Hong Kong, Australia, Singapore, Grand Cayman and Canada. Gain Capital also has a US-based retail futures business and the institutional trading platform GTX. 
 
With this latest development, it is yet to be seen what will happen to FXCM and whether it will continue its existence, as it still has to pay off a significant debt to Leucadia Corporation. FXCM still has its regulated forex businesses in the UK and across the major EU markets Germany, Italy and France, Australia, Israel and South Africa, as well as in Hong Kong, New Zealand, Japan. It could safely assumed, however, that the latest developments in the US will deal a significant blow to FXCM. 
 
TAGS: fxcm  ban  us  nfa  cftc  fine  forex  retail  gain capital  forex.com 

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