August 2007
Regulation: US capital ruling could kill off smaller dealers
by Lee Oliver and Chloe Hayward
Proposed NFA rules seen as catalyst for consolidation in US retail: The Weekly FiX
The proposal is due to be discussed by the NFA’s board in August. If ratified, it will then go to the Commodity Futures Trading Commission, which effectively acts as the NFA’s gatekeeper. The CFTC will almost certainly rubber-stamp it.
Up to $5 million
In its proposal, the NFA points out that the under-capitalization of many FDMs is the main cause of many of the problems that have plagued the sector, It is therefore looking to raise FDMs’ net capital requirements from $1 million to $5 million. Two other proposed changes to the NFA’s concentration charges and its accounting requirements are likely to result in FDMs being obliged to have a minimum of $10 million in adjusted net capital to stay in business.
The majority of FDMs do not have this much free capital available, so unless they receive fresh funding, they will almost certainly go out of business if the proposal is passed. The current situation is that only a few FDMs, including FXCM, GFT, Oanda, FX Solutions and Gain Capital, have sufficient capital to comply, although they were recently joined by Interbank FX, which has secured fresh funding of $40 million from Spectrum Equity Investors.
Todd Crossland, Interbank FX’s founder and chief executive, says: "The NFA has proposed to raise the minimum net capital requirement to $5 million. If you offer greater than 100:1 leverage, you would have to maintain two times that amount, or $10 million. We believe that by the end of the year the NFA will have fully implemented the new minimum net capital requirements. Our current net capital is [now] in excess of $25 million."
Credit lines vital
Gain chairman Mark Galant says: "Making sure all FDMs are well capitalized is a positive for the industry. The management at many of the smaller FDMs have no real FX market experience and have never managed a 24/5 trading operation. Besides being able to cover your financial obligations to your customers, you also need sufficient capital to post collateral with bank liquidity providers. An FDM that does not have good credit lines can get in trouble pretty quickly if they are unable to lay off their risk as needed."