It seemed completely out of the blue when the CFTC file a civil lawsuit against FXCM the largest Retail Forex Firm in the United States. The lawsuit was citing the undercapitalization of the firm during the now infamous Black Swan Event. The SNB event as it is also known as happened 1 and ½ years ago. The lawsuit also mentioned that FXCM failed to notify NFA and the CFTC of the shortfall.
FXCM was also charged with guaranteeing client deposits against a loss. The Black Swan event caused FXCM to have a shortfall of over $200 million and many of the accounts went into negative equity.
It wasn’t long before FXCM issued a response calling the lawsuit unfortunate and unwarranted. FXCM acknowledges being under net capital but they point out that the NFA was in their offices the day after the event and they were aware of the situation.
The question that everyone is asking is why now? What is that caused the CFTC to wait this long before filing a lawsuit on something that was very clear at the time? Is there something else that triggered the response by the CFTC?
The response from FXCM also raises many questions. FXCM mentioned that the NFA was in their offices but having the NFA in your office is not the same as giving official notification. Was this an oversight on the part of the company? Is there any documentation of them having filled such notice. The NFA uses an online reporting system to file the firms accounting data. If FXCM had completed such a filling it would take longer to produce proof. There is also the issue of the guarantee against client losses. FXCM claims they did not violate the rules in zeroing out customer balances.
Historically we have seen the larger firms get the benefit of the doubt when it comes to regulatory oversight. One example of this was PFG Peregrine Financial Group. PFG was closed down due to a $200 million shortfall that was missed by the NFA. The CEO had submitted his bank statements via fax or scanned them and he used white-out to change the numbers. It could be that this time the NFA and the CFTC have decided to apply the rules and assumptions are being made no matter the size of the firm.