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FXCM Inc.
File:FXCM Logo Blue Text White Background.gif
Company typePublic Company
Traded asNasdaq: GLBR
ISINUS3026931069 Edit this on Wikidata
IndustryFinancial Services
Founded1999 (1999)
HeadquartersNew York Edit this on Wikidata
Key peopleDrew Niv, interim CEO and Co-founder
ServicesFinancial broker, foreign exchange
Number of employees680
Websitewww.fxcm.com

FXCM, formerly Forex Capital Markets, is a retail foreign exchange market broker that has been banned in the United States for "fraudulent misrepresentation" to its customers. It has offices in the United Kingdom, Germany, and France. FXCM allows retail clients to speculate on the foreign exchange market. FXCM also provides trading in contract for difference (CFDs) on major indices and commodities such as gold and crude oil.

Following a large increase in the price of Swiss francs on January 15, 2015, the company lost $225 million and was in breach of regulatory capital requirements. The next day FXCM secured a $300 million loan with a 10% coupon from Leucadia National Corp in order to meet its capital requirements. Further terms of the loan were later released, showing that the coupon rate might rise to 17% or higher and other limitations were imposed. Citigroup analysts quoted by Bloomberg said that the terms of the loan “essentially wiped out” the value of FXCM’s stock.

On February 6, 2017 the firm agreed to pay a $7 million penalty to settle a suit from the U.S. Commodity Futures Trading Commission (CFTC) involving fraudulent misrepresentation by FXCM to its customers and to regulators. FXCM withdraw its CFTC registration, and agreed not to re-register in the future, effectively banning it from trading in the United States. Three top managers have resigned under regulatory pressure and the majority owner of the firm has changed its name to Global Brokerage Inc., effective January 27, 2017. Non-US regulators are also investigating the same or similar incidents.

A Managing Director of Leucadia National Corp, which holds a 49.9% equity stake in the company, has been appointed chairman of the FXCM board. The staff of FXCM's London operation have been told to seek other employment, according to unnamed sources cited by Reuters, though, as of February 24, 2017, the firm appears to be still trading in the United Kingdom and other countries in Europe. Its U.S. accounts were sold to Gain Capital. About 40,000 customer accounts were sold at about $375 each.

Corporate structure

The parent company, Global Brokerage Inc, formerly called FXCM Inc,, is publicly traded on NASDAQ. Leucadia National Corp does not own any shares in Global Brokerage. Global Brokerage owns a 74.5% interest in Global Brokerage Holdings, which owns 50.1% of FXCM. Leucadia owns the other 49.9%, plus debt worth $123 million as of March 31, 2017. FXCM owns all the operating companies.

Drew Niv, who had earlier resigned the position, is interim Chief Executive Officer of Global Brokerage until his successor is named. At FXCM Brendan Callan is the interim CEO and Jimmy Hallac of Leucadia is Chairman of the Board. Cash generated by FXCM is first applied to pay off the debt owned by Leucadia, which may force a sale of FXCM in January 2018 if the debt is not paid.

History

Founding

Forex Capital Markets was founded in 1999 in New York, and was one of the early developers of online forex trading. Initially, the firm was called Shalish Capital Markets, but after one year, rebranded as FXCM. In January 2003, FXCM entered into a partnership with Refco group, one of the largest US futures brokers at the time. Refco took a 35% stake in FXCM and licensed the FXCM software for use by its own clients. Refco filed for bankruptcy on October 17, 2005, a week after a $430 million fraud was discovered, and two months after its initial public offering of stock. Refco's CEO Phillip R. Bennett was later convicted of the fraud. FXCM became entrenched in the Refco bankruptcy proceedings for several years.

In 2003, FXCM expanded overseas when it opened an office in London which became regulated by the UK Financial Services Authority.

In 2008, the self-regulatory organization for the US futures industry, the National Futures Association (NFA), obtained permission from the Commodity Futures Trading Commission (CFTC) to increase the minimum capital requirements, in staged increments, to $20M for "Forex Dealer Members" including FXCM. The increase was in response to the failures of some forex brokers, and it allowed FXCM to acquire new business from some of its smaller competitors who either ceased all operations or moved out of the US. The same year it continued its overseas expansion and opened offices in France and Australia.

The following year FXCM UK started offering a limited number of CFDs to its non-US based clients, in addition to its currency products. In May 2010, FXCM acquired the UK CFD and spreadbetting provider ODL.

Initial public offering, law suits, fines and expansion

In December 2010, FXCM went public and began trading on the NYSE, becoming the first forex broker in the US to issue stock to the public. The initial public offering price was 14.00 per share. The following year, in February and March 2011, a number of class actions lawsuits were filed against FXCM, alleging fraud and racketeering from deceptive and unfair trade practices, and misleading shareholders during the 2010 IPO.

In August 2011, the NFA fined FXCM $2 million for slippage malpractices. FXCM also settled with the CFTC for $6 million for failure to pay positive slippage to customers. FXCM also paid clients restitution of about $8 million.

In February 2014 the Financial Conduct Authority (FCA) fined Forex Capital Markets Ltd and FXCM Securities Ltd (“FXCM UK”) £4,000,000 for similar slippage violations and for failing to inform the FCA of the CFTC investigation of the same practices. About £6 million ($10 million) was also paid in restitution to FXCM UK’s clients.

In October 2011, FXCM completed its acquisition of Japanese FX broker Foreland Forex Co., Ltd. for approximately $17M, net of cash and liquid assets acquired.

On October 25, 2011, three debtors, Certified, Inc., Global Bullion Trading Group, Inc., and WJS Funding, Inc., filed an adversary complaint in the United States Bankruptcy Court for the Southern District of Florida against Forex Capital Markets LLC, ODL Securities, Inc., and ODL Securities, Ltd. (“Defendants”). The complaint asserts claims under the Federal Bankruptcy Code to recover allegedly preferential and fraudulent transfers to the Defendants, under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C §1961 et seq., as well as the common law. The complaint seeks an unspecified amount of compensatory and punitive damages, interests, and costs.

In June 2012 FXCM bought a controlling stake in Lucid Markets LLP, a London-based automated trading group focused on currency trading.

In November 2016, FXCM expanded to South Africa, with an office is based in Johannesburg.

From 2005-January 2017, FXCM faced a total of 13 CFTC reparations cases, 17 NFA arbitration decisions, and 8 other regulatory actions in the U.S.

CFTC penalty and NFA membership revocation

FXCM promised its customers a "no dealing desk" trading system, taking prices from a number of major banks and allowing clients to trade the best price at any given time. This is also known as a direct market access (DMA) system, in contrast to a market maker system more commonly used by forex brokers. In a "dealing desk" or market marker system, FXCM would be the counterparty to every trade and would profit only when its customers lost money, and would lose money whenever its customers profited. In a "no dealing desk" system FXCM would act simply as a broker, getting a commission on every trade, while the banks take the risk on the trades and FXCM avoids a conflict of interest.

On February 6, 2017, the CFTC imposed a penalty of $7 million on FXCM for defrauding its retail customers. The Commission found that a closely related company was acting as the main market maker for its trades, and that FXCM lied to its customers about the market maker.

The Commission prohibited the company from registering with CFTC, effectively banning it from the US commodity brokerage industry. The same day, NFA barred FXCM from its membership. The company reacted by selling its US customer base to a rival forex broker Gain Capital Holdings Inc.

On February 13, 2017 FXCM agreed to pay another fine of $650,000 to the CFTC to settle charges that FXCM was undercapitalized by $200,000,000 in January 2015.

As of March 4, 2017 the firm was not accepting customers from many countries, including Hong Kong, Japan, the Russian Federation, Singapore, Turkey, Ukraine, the United States, and the US Virgin Islands. On March 30, 2017 Forex Capital Markets LLC ceased representing FXCM Australia.

On April 27, 2017 Leucadia National Corp. reported to the US Securities and Exchange Commission that they had marked down the value of their equity investment in FXCM by $130 million. They report cumulative gains on their original investment of about $300 million and that they "have nearly recovered the full amount of cash we invested." They are still owed $123 million in debt and value their equity position at $187 million.

Global Brokerage Inc. regulatory reports

Global Brokerage, the owner of FXCM, filed a 10-K report on March 20, 2017 stating:

The Company’s subsidiaries are cooperating with regulatory authorities outside the U.S. in relation to their requests for information arising from the settlements announced on February 6, 2017.

and

The Convertible Notes mature on June 15, 2018. At that time, we will be obligated to repay the aggregate principal amount of the Convertible Notes. We may not have enough available cash or be able to obtain financing at that time to meet our repayment obligations”

Industry criticism

Critics of the industry state that few retail traders have the experience to make money trading forex. Drew Niv, then chief executive of FXCM, said: "If 15% of day traders are profitable I'd be surprised." The New York Times quoted Marc Prosser, then Chief Marketing Officer at FXCM saying "Don't just call it investing - this is speculation, and people should only be putting up risk capital they can afford to lose." In each quarter of 2014, between 67% and 70% of FXCM open customer accounts lost money.

References

  1. "Drew Niv Still Retains an Active Role at Global Brokerage (FXCM)". Finance Magnates. May 1, 2017. Retrieved May 1, 2017. (2017)
  2. "FXCM Inc. 8-K". FXCM. February 6, 2017. Retrieved April 17, 2017. (2017)
  3. ^ Evans, David; Buckland, Kevin (January 16, 2015). "Casualties From Swiss Shock Spread From New York to New Zealand". Bloomberg. Retrieved March 14, 2017.
  4. "FXCM Comments on Swiss Franc Movement". GlobeNewswire. CNN. Retrieved January 16, 2015.
  5. Stone, Mike; Chavez-Dryfuss, Gertrude; Toonkel, Jessica (January 16, 2015). "FX broker FXCM gets rescue from Jefferies parent Leucadia". Reuters. Retrieved January 16, 2015.
  6. Faux, Zeke. "FXCM Owners Almost Wiped Out as Bailout Lets Leucadia Force Sale". Bloomberg. Retrieved January 20, 2015.
  7. Wall Street Journal Staff (January 20, 2015). "FXCM rescue package includes rising interest rate". Staff. Market Watch. Retrieved January 20, 2015.
  8. Atkins, Dorothy (February 6, 2017). "FXCM To Pay $7 M For Hiding Deal With Market Maker". Law360. LexisNexis. Retrieved February 23, 2017.
  9. ^ Chavez-Dreyfuss, Gertrude (February 21, 2017). "FXCM changes company name; appoints interim CEO". Yahoo Finance. Reuters. Retrieved February 24, 2017.
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  12. ^ "NFA bars New York retail foreign exchange dealer Forex Capital Markets, LLC and its principals Dror Niv, William Ahdout and Ornit Niv from membership". NFA. February 6, 2017. Retrieved February 7, 2017.
  13. ^ "Global Brokerage, Inc., Form 10-K". Edgar Online. Securities and Exchange Commission. Retrieved March 20, 2017.
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  16. ^ "LEUCADIA NATIONAL CORPORATION, 1ST QTR. 2017, Form 10-Q". Securities and Exchange Commission. Retrieved May 5, 2017.
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  22. Harry Wilson (May 4, 2010). "Forex broker ODL accepts US takeover". telegraph.co.uk. London.
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  24. "FXCM's IPO Raises $211 Million at Midpoint of Range". Bloomberg. August 21, 2013.
  25. "Morgan Business Trial Group Files Class Action Lawsuit Against Nation's Largest Forex Dealer – FXCM". February 10, 2011.
  26. "Kahn Swick & Foti, LLC And Former Louisiana Attorney General Announce Investigation Into FXCM, Inc. – FXCM". February 16, 2011.
  27. "Law Offices of Howard G. Smith Announces Investigation On Behalf of Investors of FXCM Inc". February 17, 2011.
  28. "Investor Relations (Press Release)". October 3, 2011.
  29. Financial Conduct Authority (February 26, 2014). "The Financial Conduct Authority fines FXCM UK £4 million for making 'unfair profits' and not being open with the FCA". Retrieved April 26, 2017.
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  37. "FXCM sells its US clients to Gain Capital as it exits US Forex market". LeapRate. February 7, 2017. Retrieved February 7, 2017.
  38. Stempel, Jonathan (February 13, 2017). "FXCM to pay $650,000 CFTC fine over capital shortfall". Reuters. Retrieved February 23, 2017.
  39. Nikolova, Maria (March 4, 2017). "FXCM.com removes all mention of Non Dealing Desk model". Finance Feeds. Retrieved March 4, 2017.
  40. Nikolova, Maria. "Forex Capital Markets LLC finally ceases to be Australian Financial Services Representative". Finance Feeds. Retrieved April 14, 2017.
  41. "LEUCADIA NATIONAL CORPORATION ANNOUNCES FIRST QUARTER 2017 RESULTS". SEC.gov. Retrieved April 28, 2017.
  42. Nikolova, Maria (April 28, 2017). "Leucadia announces $130 million markdown on FXCM equity investment". Finance Feeds. Retrieved April 28, 2017.
  43. Nikoleva, Maria. "FXCM (Global Brokerage Inc) warns of heavy risks due to Leucadia deal, regulatory action". FinanceFeeds. Retrieved March 20, 2017.
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