FXCM Hobbling Shows Retail Rules Need Review, CFTC’s Bowen Says

The Commodity Futures Trading Commission should consider tighter regulation of retail currency trading after losses from the Swiss franc’s surge last week left a leading brokerage in need of a $300 million rescue, according to a member of the panel.

Retail foreign-exchange trading “is the least regulated part of the derivatives industry,” and the CFTC needs to review whether current federal oversight provides adequate protections for customers, Commissioner Sharon Bowen said in a statement Wednesday.

FXCM Inc., the largest retail foreign-exchange broker, faced a shortfall last week when customers suffered big losses after the Swiss central bank decided to let the franc float against the euro. The New York-based firm, which handled $1.4 trillion of trades for individuals last quarter, said it was owed $225 million.

The CFTC and the industry-funded National Futures Association permit traders to have leverage of as much as 50 times the amount of money they deposit with a brokerage. By contrast, investors buying stock with borrowed money must put up at least 50 percent of the purchase price under Federal Reserve rules.

“I am concerned that lower standards are putting this industry in a precarious position and placing retail foreign exchange investors unnecessarily at risk,” said Bowen, a Democrat who joined the agency last year.

The CFTC, which has spent the last four years increasing oversight of swap trading by Goldman Sachs Group Inc., JPMorgan Chase & Co. and other firms, “has an obligation to seriously consider enhancing our regulations of retail foreign exchange dealers,” she said.

Lost Money

Most of FXCM’s retail clients lost money in 2014, according to the company’s disclosures mandated by the CFTC. The percentage of losing accounts climbed from 67 percent in the first and second quarters to 68 percent in the third quarter and 70 percent in the fourth quarter.

The brokerage was among firms that lobbied against a past CFTC effort to toughen leverage regulations.

The agency’s proposed restrictions to limit leverage to 10 times would have had “a devastating impact on the retail forex industry,” Drew Niv, FXCM’s chief executive officer, wrote in a March 2010 letter to the CFTC that was signed by eight other executives at currency dealers. The industry relies on “electronic systems” to liquidate customer trades and protect against “currency fluctuations in the market,” they said in the letter, which is posted on the CFTC’s website.

FXCM was rescued when Leucadia National Corp., owner of New York-based Jefferies Group, subsequently said it would provide $300 million to enable the brokerage to meet regulatory capital requirements and continue normal operations.

The NFA, an industry-funded regulator, is reviewing its rules for leverage in the market and assessing whether changes are needed, Karen Wuertz, the group’s spokeswoman, said Tuesday.

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