The NFA or National Futures Association just announced it would increase its 2016 budget to $85 million. The site that there will be increased oversight of Swap Dealers and Major Swap Participants. They also note that there will be a more onsite inspection of members. For many, the budget increase and the increased oversight is too late for many that were missed in the past. The NFA and other significant regulators seem always to be responding or reacting to one of their member firms blow ups rather than preventing them. Which of course is the role of a regulator? Forex Regulators seem to be more focused on regulating smaller firms and not applying the same amount of scrutiny to some of the larger firms. This may be part of the culture of the regulators that should change.
One example of this that comes to mind is that of PFG Best. PFG Best was a Futures and Forex firm which would undergo annual audits as all NFA member firms do. For 20 years Russell Wassendorf was convincing the NFA and its auditors of the firm’s capital position with a straightforward trick. He would merely white out and change the balances on the firm’s bank account statements. None of the regulators over all these years ever bothered to check the actual bank account online or do any form of account validation. Over this time Wassendorf was able to take over $200 million from customers funds.
Forex Regulators like the NFA need to restructure and prioritize their oversight. Too many resources are dedicated to small firms that are already burdened with constant regulatory changes and cost. Regulators should not show preferential treatment to firms or companies that are larger or may have been in business for a more significant period. Regulators have a great responsibility in the oversight of firms, and the member firms should all be treated equally and placed under the same standards.
These cases are not just reserved for regulators in the US. In the UK the situation of Alpari which is currently in the administration of the UK version of bankruptcy. The cause of Alpari UK was linked to the Swiss National Bank events from January 15th. There are indications that the firms may have been operating below capital minimums for over one year. Alpari was probably one of the most recognized names in Retail Forex, and this may also have contributed to a more hands-off approach to oversight.
A common sense approach to regulation needs to happen. There is no need to send five auditors to a one-man office. The number of auditors should be proportional to the size of the company or assets under management. The same level of scrutiny needs to happen for the larger companies that happen to the smaller ones. Some simple changes and a new approach may prevent the next PFG or Alpari from happening again.