Developing...

The National Futures Association has closed another Dead Forex Firm Walking. Only a few days ago you'll remember I spoke of going short Nations LLC at Intrade. I only wish there were such a contract because the firm has officially gone belly up and I could have made a killing. The NFA on its website today stated the firm has been shuttered:

http://www.nfa.futures.org/basicnet/...&contrib =NFA

The firm was a whopping $3.5 million under its capital requirement. One of the important points I probably have not stressed enough is that in addition to the minimum $5 million a firm is going to need to meet its initial cap requirement, firms also need to set aside 10% of their customers assets in addition to meeting various CFTC outstanding position requirements. That means most firms will probably need $10 million just to stay in business when the new cap requirement passes. Just think if dead forex firms walking aren't even meeting their capital requirements now how on Earth will they be able to meet them when they get raised dramatically in the future? It looks like the The Forward Forex Follies is going to be just the tip of the iceberg in the months to come...

And no amount of capitalization is going to improve the situation for forex traders unless basic safeguards are in place.

My evil mind thinks that the NFA wants to discourage forex trading altogether and has found the perfect promotor of this idea in forexsavior who continues to dish up horror story after horror story. It's tabloid-worthy material; the only thing missing are some juicy pictures of boiler room dealing desks and handcuffed (former) CEOs.

In true tabloid fashion I'm going to give you a preview of an upcoming post by forexsavior:

As you can see, this is genuine National Enquirer material... Note how the author establishes a link between RefcoFX and FXDD... Mind you, this is not a factual relationship and it doesn't matter that the NFA does not protect the accounts of Forex traders against bankruptcy claims endured by Forex brokers, regulated or not... It helps builds the suspense... Knowing about RefcoFX, how could you even consider FXDD... The best part is the repeated use of "fair" and "fairness"; tabloids and FOX News do that all the time... Great stuff!

I think the NFA has gone crazy. They are now demanding a percentage of all trades, requiring everyone in the industry to be regulated by them, and drastically increasing their fees. If I were a broker, I would not want to become NFA regulated.
National Futures Association | News Center
(click the proposed rules)

Linuxuser, I'm going to look over the list of brokers again soon. Have you looked into tax requirements for US account holders in Canadian accounts? Do they get protection too? Are they required to pay any Canadian taxes in addition to US taxes? I'm interested in these answers because it would save me time looking them up myself.

Tradition Group is no longer majority shareholder of FXDD. FXDD and Tradition Group have separate bank accounts. FXDD != Tradition Group. If FXDD wanted to be regulated, I'm sure they could come up with the money. If the amount listed for Tradition Group was all of the money they had, I doubt they could have afforded giving so much money up as prize capital for joining the contest.

IBFX does not have spreads similar to ECN. Never claim that without data please! Even the lowest rung ECN (MBTrading) has decent spreads:
USDJPY 1 pip
EURUSD 1 pip
USDCHF 1 pip
AUDUSD 1 pip
EURJPY 1 pip
GBPUSD 1 pip
USDCAD 1 pip
EURGBP 1pip
GBPJPY 3 pip (yellow alert)
CHFJPY 1 pip
GBPCHF 3 pip (yellow alert)
EURAUD 2 pip (yellow alert)
EURCHF 1 pip
AUDJPY 1 pip

I see the yellow alert currencies flash green sometimes, red sometimes. Red is over 3 pips, yellow is over 1 pip. It is also possible to trade inside the spread.

FIX protocol work is underway, and the connections are close. I'm not going to bother with a broker, I don't like the idea of trading with a broker. I don't see any point at all in using a broker aside from having MT4.

I have the software manual to the Administration panel for MT4. I think I could set up an MT4 broker in 2-3 hours. Pretty simple stuff, only delay might be getting the feed configured if you have a nonstandard one.

I am crushed that you have linked me with the national enquirer! Mind you that is not a factual relationship and it doesn't matter that the NFA does not protect customer accounts when the issue is of capitalization and transparency. In any case couldn't you have come up with a better tabloid rag than the national enquirer? Everyone beats up the Enquirer (after reading it cover to cover of course as you do my posts Zuijlen ) I have always preferred the Weekly World News and try to model my writing style on their witty commentary...

So what happened at Nations? Why was the NFA forced to take an "emergency Action" and shut them down? Well, because it was basically one of the industry's worst nightmares come true. An undercapitalized firm suffered massive losses and was forced to cover them with customer funds. Here is what the emergency action states:

"On Saturday, July 21, 2007, Nations sent to NFA, via e-mail, notice that it had fallen under the minimum required adjusted net capital."

On Monday, July 23, 2007, NFA sent a letter to Nations notifying the firm that as it was unable to demonstrate compliance with the minimum requirements Nations was to cease doing business. That same day, NFA received another notice from Nations representing that the firm had fallen under the required minimum "due to losses in the forex markets." This letter also indicated that Nations was attempting to raise $5 million "to make customers whole." (YIKES! "make customers whole?!" Who on Earth is going to give Nations $5 million?! While nations has been successful at making a fool of their customers they certainly won't be making them whole.)

Nations also provided NFA with a Form 1-FR as of July 20, 2007, which indicates that Nations owes customers trading in on-exchange futures more than $3 million and customers trading Forex more than $5 million. (Wow. What an implosion. They are $8 million in the hole? What the hell were they doing over there going to Vegas and playing craps with customer funds?)

This looks like another messy court case. With financials like this I expect the creditors will be coming out of the woodwork laying claim to what's left of Nations. If they're lucky they might be able to seize a fax machine or two, but as for customer funds, well, looks like some stripper in Vegas got her hands on that money first...

I had posted a response but it mysteriously disappeared... Ah, well, it doesn't matter...

I don´t know about taxes.

This is what I´ve got after email them almost one year ago.

Just try to contact them.
Answer takes 24h.

Well, just thinking...
If a foreign citizen will be eligible to contribute a little to Canadian taxes. It will be ok for me.
This funds are financed by local tax payers or local companies.
It would not be fair. Like secure you car using the neighbors credit card.

However as a foreign citizen in the US you can choose to not pay taxes after you swear you´re doing that in your country.
Maybe, you could do the same in Cad.

__________________

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What about Refco? This is a common refrain I have been hearing from critics of the NFA Forex Dealer Dead Pool. Refco was massive and they went under in record time which proves that being adequately capitalized doesn't matter right? Wrong. While citing Refco is a good sound byte it in no way helps the case of the undercapitalized. Here's why:

First of all Refco was a gigantic octopus of a company that had various affiliates and subsidiaries that were both regulated and unregulated. The two main players in the Refco saga were Refco Capital Markets (the unregulated outfit in Bermuda that was doing all those shady off-exchange trades) and Refco LLC (which was the licensed futures brokerage most traders knew about.) Refco Capital Markets was where the scandal erupted. For years executives at RCM covered up huge trading losses with creative bookkeeping. But when the scandal became public it caused a bank run everywhere at Refco. The bank run occurred even though Refco had adequate capital to handle the huge trading loss RCM had incurred. But that didn't matter because Refco was a publically traded company. As the stock price tanked talk of lawsuits by shareholders accelerated the bank run and that's when Refco's creditors stepped in and pushed the firm into bankruptcy knowing the only assets the firm had were the customer funds on deposit.

Had Refco not been a public company the scandal would have been a one day hiccup and it would have been business as usual precisely because it had a lot of capital reserves. That is a huge distinction that needs to be made. But when undercapitalized firms such as Nations Investments take huge trading losses there is no room for error. It's one and done because they have no capital in reserve. Again, this is why the NFA has issued this proposal. Undercapitalized firms do not have the luxury of taking the kinds of hits that large firms can take. This is also why there hasn't been a single case of a registered forex dealer member with over $10 million ever going bankrupt. So to the critics I say cite Refco all you want but it has no place in this debate unless you want to discuss the perils of being unregulated.

CIPF appears to be an independent nonprofit, and not a government agency. They only allow brokers who follow government regulations and impose a few extra requirements: balance statements on request, CIPF guidelines on request, annual dues. The annual dues might be less than what the NFA is proposing to charge. There are also 3 independent self regulatory agencies, similar to the NFA in general independence.

The CIPF fund solvency is limited to their funds. The full year end report is available at http://cipf.ca/LOOK_images/06_allRep...l_Eng_web2.pdf

Numbers at the end of 2006: According to the report they are just now creating a mathematical model for risk assessment. :/ Since 1969 there were 17 member insolvencies. I think the same insolvency rate for the US was 4 or 5 since 1990, it would be interesting to see how many crashes there were during the junk bonds era in the US. They have paid out $38 million, they are currently worth $277 million. Line of credit for another $100 million. That covers $1.2 trillion of across 198 CPIF members. They have expenses of
$34.7 million per year ON WHAT I DO NOT KNOW. They are also heavily invested in T-Bonds. Oops.

Salaries and employee benefits: $2.2 million
Pension and other employment benefits: $415k
Employee future benefits: $3.5 million per year.

So in the case of a big crash and 20 firms out of 198 go bankrupt because they assumed a normalized risk and not a market shift risk, that is about $120 billion that needs to get paid out of $377 million (with full borrowing and assuming even distribution of funds e.g. a large firm would need to go down as well). The appear to cover 0.03% of the total funds at large. They could make up an asset deficiency of 0.3% on 10% failure rate.

I'm glad they are paying themselves $6 million a year! One thing I couldn't find is the total number of employees in their financial statement. I found 18 by name, I bet there are less than 30.