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FXCM and Voluntarily Register as Swap Dealers

Mar 19 2013

As per the U.S. Commodity Futures Exchange Commission's rules, 10-K reports must be submitted within 60 days of the end of the fiscal year. A 10-K is a fancy annual report that includes the actual annual report together with a ton of other details – company history, equity, organizational structure, subsidiaries, holdings, earnings per share, and so on, and so on. 10-Ks are submitted every year with the good old CFTC. 

The two largest forex brokers out there, FXCM and, have already submitted their 2012 10-K reports and notices and interesting fact: both companies have registered as Swap dealers. 
By definition, a swap dealer is anyone who acts as a counterparty in a swap agreement for a fee – in other words, swap dealers are the market makers for the swap market. The Dodd Frank Act requires every swap dealer to register with and report to the SEC and CFTC, and apparently, after re-examining their businesses in light of the latest changes to the Dodd Frank, FXCM and Gain Capital found it best to voluntarily register as swap dealers (most probably because of their institutional division). 
Below are the respective excerpts from both's (Gain Capital's) and FXCM's 2012 10-K reports.

Gain Capital's 2012 10K Swap Registrarion Details

The Dodd-Frank Act also provides for additional regulation of swaps and security-based swaps, including some types of foreign exchange and metals derivatives in which we engage. The Dodd Frank Act requires the registration of swap dealers with the CFTC and imposes significant regulatory requirements on swap dealers. Certain of our subsidiaries may be required to register, or may register voluntarily, as swap dealers. Effective February 27, 2013, GAIN GTX, LLC, became registered with the CFTC and NFA as a swap dealer.

Swap dealers are subject to a comprehensive regulatory regime with new obligations for the swaps activities for which they are registered, including adherence to risk management policies, supervisory procedures, trade record and real time reporting requirements as well as proposed rules for new minimum capital requirements. Swap dealers also are subject to additional duties, including internal and external business conduct and documentation standards with respect to their swap counterparties. Swap dealers also will be subject to new rules under the Dodd Frank Act regarding segregation of customer collateral for cleared transactions, position limits, large trader reporting regimes, compensation requirements and anti-fraud and anti-manipulation requirements related to activities in swaps.

The specific parameters of these swap dealer requirements are being developed by the CFTC and other regulators. The full impact of the regulation on GAIN GTX and any other of our subsidiaries that register as a swap dealer remains unclear. It is likely, however, that these entities will face increased costs due to the registration and regulatory requirements listed above. Complying with the proposed regulation of swap dealers could require us to restructure our businesses, require extensive systems changes, require personnel changes or raise additional potential liabilities and regulatory oversight. Compliance with swap-related regulatory capital requirements may require us to devote more capital to our GTX business. The increased costs associated with compliance, and the changes that will be required in our OTC and clearing businesses, may adversely impact our results of operations, cash flows, or financial condition. The extraterritorial impact of the swap dealer rules also remains unclear.

FXCM's 2012 10K Swap Registrarion Details

FXCM Registration as a Swap Dealer could subject the Company to additional regulation and compliance requirements which could materially adversely affect its business and financial condition.

Recently adopted rules under the Dodd Frank Act have established a comprehensive new regulatory framework for the derivatives markets generally. In response to the Dodd Frank rulemakings that further defined “swap”, we conducted an in-depth review of the products offered by the firm and, as a precautionary measure, applied for registration as a Swap Dealer on a provisional basis with the NFA on December 31, 2012.

The impact of registration as a Swap Dealer on the Company remains unclear. However, additional regulation and ongoing compliance of any kind may carry additional expense and new challenges for our management team and may have a material adverse effect on our business and financial condition.

We will continue to monitor the applicability of the rules to the firm’s existing business practices.


TAGS: Gain Capital  FXCM  swap dealer  SEC  CFTC  10-K  annual report 

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