Broker Shutdowns - Page 2

idontdowindoughs · #11 (**permalink**) 03-12-2008, 05:25 AM

Hello RobertMc

I will do my best to answer you questions and I thank you very much for your concern.

I spoke with the leader of our group today and found I was personally misinformed as to the company involved. It was NOT Goldman-Sachs, it was a money managers account at US Bank. It was the same situation from what I understand. The money was supposed to be separate from funds used for margin trading. I sincerely apologize for this; when we discussed the shutdown as a group, I had understood it to be Goldman-Sachs. Nevertheless, as Ms. Sunu's letter pointed out, they still consider our money to be an asset of FXLQ.

"With respect to the classification of customer funds as assets of FXLQ,
this is a standard accounting issue. For all financial institutions who
hold customer funds (including broker-dealers and futures commission
merchants whose customers trade on-exchange futures), customer funds are
listed on the firm's books as an asset, which is off-set by liabilities
owed to customers."

And also
"Additionally, FXLQ had no funds at Goldman Sachs at any point, although they did have funds at several other financial institutions."

I am now assuming this included the money managers account at US Bank.

As to the trades-
"While it is true that customers could not put on any new positions,
customers were able to liquidate existing positions, or continue to
roll-over trades if they wanted to keep the position on. Therefore, you
did have the ability to keep a trade and close it out when you deemed
that to be appropriate."

This is both true and in my opinion untrue. They did allow rollover, and they did allow you to liquidate existing positions. However, what they did not allow was critical modifications to existing positions to allow them to be closed safely.

I personally do not know exactly how our trade was being managed, but I can and will explain the basis of carry trades, which is what this was. The essential purpose of a carry trade is to earn interest and not necessarily to earn profit on the movement of the currency. There are pairs that pay a high rate of daily interest. You may either hedge the same pair, or put half in one pair and half in another also as a hedge. Therefore HALF of the trade (depending on how it is being managed) may be running fairly close to a margin call, because it is losing in terms of the movement of the currency, however it may be gaining interest. I am not an expert on this process, the person managing the trade was and is. The point is that half of the trade was losing, and the person managing the trade was not allowed to do anything with it including moving the SL. If some notice had been given, he had a plan in place he was using at the time to manage this trade, but he was given no notice and was therefore unable to salvage the trade costing us about 50% of our money.

I wrote to Ms Sunu at the time, telling her that I personally find the tactics the NFA used to be gestapo like. The problem is NOT that they took action, as membership in the NFA is voluntary, but that NO respect was shown to the TRADERS that made their livelihood at FXLQ. I told this to Ms. Sunu in my letter asking her how she'd like to be fired from her job with no notice, no reprimand, and NO UNEMPLOYMENT. To me, some sort of WARNING, not a request for information, should have been issued to FXLQ with requirements to pass the information of suspected NFA violations on to traders. I still feel very angry about this. I was taking a personal vacation from trading for health reasons and I had put not only my funds, but an account I was managing for a friend in the hands of someone I felt was a good trader, only to have this happen.

The statement about customers being told that FXLQ had the funds to pay back customers by staff is apparently true as well, as our funds manager received a personal call from one of the higher ups within a few days of the shutdown saying that FXLQ had the funds to pay all customer accounts.

To summarize. The statement I made, "In my understanding the horrifying thing was that in spite of our vehement protests when the NFA shut down FXLQ they FROZE the Goldman-Sachs account, and WORSE than all that, it has been declared an ASSET of FXLQ, and subject to CREDITORS which at least DOES include us, but does NOT exclude others who are not traders. In other words the electric company has the same rights on our money that we do because they are creditors as well." remains true except that it was the US Bank Managers account instead of Goldman-Sachs. Again my apologies.

Robert M, you said,
"I await your response and I will be contacting Gov. Crist to see if
there is anything we can do to put a stop to the tremendous amount of
scams and lack of regulation the forex market has in Florida and
nationwide."

Robert, I am grateful for your concern.

Please consider the following though. I obviously do think there are problems in the Forex industry. MANY. But it is still a place where the little guy can get it, have some fun, make some money , and once he goes through the bumps eventually make a living from it. Sadly, I find the regulators to be just as bad as the bad brokers they are trying to regulate. I think the more government regulation there is, the less likely it will be that the little guy will be allowed to invest and learn, as the brokers will start spending huge amounts of money trying to follow all these regulations that they will simply stop taking less than thousands of dollars which will probably also be then included in the regulations. That in turn will eventually by their very nature take one of the few remaining places that the little guy has a chance to make money.

I personally believe the best answer to this is for traders to get together forming a powerful organization starting by simply protecting themselves from broker shutdowns, but so far I haven't seen anyone besides myself willing to get down and work for it unless they think there is a better way. It isn't going to do me any good by myself. I have already taken the steps that I recommend for individual traders, and that was further explained by forexmgr. Think about what an effect it would have that if a broker was messing with clients the way some MT brokers do, that they were suddenly threatened with losing even a fourth of their accounts? Together we can make a REAL change.
My 2 cents worth.

I hope Linuxser, that I have done my job and explained a little better and I thank you for all your excellent work here as you are doing a wonderful service to traders by helping this forum. ;-)

Best to both of you!!!!

idontdowindoughs · #12 (**permalink**) 03-12-2008, 07:48 AM

Hi,

I realized when I reread Linuxser's question that I had not explained something clearly.

Here it is as I understand it. Companies like Goldman-Sachs set up separate accounts for traders so that the client's money is not mixed in with the brokers money. Money is moved in and out of the trading account only as is required for trading. The broker knows it is there, rather like a trust fund, but in case of a broker shutdown, that money is supposed to be the client's exclusively. You need a lot of money to have this available to you. The US Bank money managers fund was supposed to serve the same purpose for less than the 1 Mill that is required for G-S. It was frozen.

Linuxser · #13 (**permalink**) 03-13-2008, 02:14 PM

Hi,

Something about regulations and assets.

National Futures Association | News Center

Quote:

Notice I-08-13March 12, 2008
Regulatory Reminder Regarding Assets Held Outside the United States
NFA has received inquiries from Members regarding the treatment of deposits at foreign banks for purposes of meeting segregation, secured amount, liabilities owed to retail forex customers, and net capital requirements. The purpose of this reminder is to briefly summarize the current regulatory treatment of such deposits.1
Customer Segregated Funds and Secured Amount
CFTC Rules 1.49(d)(3) and 30.7 establish the requirements for the denomination and location of customer segregated funds and the secured amount, respectively.
Rules 1.49 and 30.7 provide, in pertinent part, that customer funds may be held at: (1) a bank or trust company located outside the U.S. if the institution has in excess of $1 billion of regulatory capital or its commercial paper or long-term debt or, if part of a holding company system, its holding company's commercial paper or long-term debt, is rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization; (2) a futures commission merchant registered with the CFTC; or (3) a derivatives clearing organization. For the secured amount, Rule 30.7 also permits funds to be held at a member of a foreign board of trade or its designated depositories or the designated depositories of a derivatives clearing organization. Rule 1.49 further requires that, unless a customer instructs otherwise, segregated customer funds must be held in the U.S., a money center country (i.e., Canada, France, Italy, Germany, Japan, and the U.K.), or the country of origin of the currency, provided that the firm continues to meet the segregation requirements set forth in Rule 1.49(e).
Liabilities Owed to Retail Forex Customers
NFA Financial Requirements Section 14 provides that a Forex Dealer Member may hold assets outside the United States for meeting its liabilities to U.S. customers only if those assets are in a money center country, as defined in CFTC Rule 1.49. Further, the institution at which the assets are held must be: (1) a bank or trust company regulated in the money center country in which it is located that has in excess of $1 billion of regulatory capital or its commercial paper or long-term debt or, if part of a holding company system, its holding company's commercial paper or long-term debt, is rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization; (2) an entity located in a money center country, regulated there as the equivalent of a broker-dealer or futures commission merchant, and either has in excess of $100 million of regulatory capital or have its commercial paper or long-term debt rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization; or (3) a futures commission merchant registered with the CFTC and a Member of NFA. If assets are being held in a money center country, the Forex Dealer Member must also file with NFA a signed agreement with the qualifying institution authorizing that institution to directly provide to NFA and the CFTC information regarding the Forex Dealer Member's accounts.
Net Capital
The instructions to the Form 1-FR-FCM provide that in order to be considered as current assets for capital purposes, offshore deposits of proprietary funds must be held in a major money market country2 at a bank or trust company that has net assets in excess of $100 million and is subject to regulatory supervision by an authority of a sovereign national government. These requirements are not the same as those for segregation and the secured amount, and a foreign depository may be permissible for one purpose but not the other.
Questions concerning this notice should be directed to Sharon Pendleton, Director Compliance (spendleton@nfa.futures.org or 312-781-1401) or Michael A. Piracci, Senior Attorney (mpiracci@nfa.futures.org or 312-781-1419).

1 This notice addresses only those requirements pertaining to foreign depositories and is not intended to address all requirements regarding the acceptance and holding of customer funds or the Member's capital. As always, Members are reminded to review all pertinent rules and regulations. 2 For purposes of the net capital rule, those countries considered to be major money markets are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong-Kong, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, Taiwan, United States and United Kingdom.

robertmc · #14 (**permalink**) 03-13-2008, 02:44 PM

Which brings us back to the idea that Alecohfx had (disregarding whether he's a scammer or not) about the possibility of a broker that treated traders right being able to excel above all the others due to fair service, possibly utilizing your idea about a separate fund. I've come to see that the forex community is very actively involved in forums and word-of-mouth is king. A broker that was willing to not hunt stops or use virtual dealer tricks or any of the other myriad of ploys would make less per customer but would have many, many more loyal customers in return making it more profitable for them in the long run. If we could form some sort of unified block of customers, it would have great appeal to such a broker.