When the fickle finger of regulatory fate points in your direction, you had best move on and do whatever it takes to survive. FXCM went from being the largest forex broker in the United States market to being immediately excommunicated by the CFTC from the region, a story that may be stranger than fiction, but surely received everyone’s attention in our industry. Reputation risk is the issue, and when a management team plays fast and loose with this imperative, judgment can be swift and harsh as a consequence.
Some may view the consequential penalties as excessive, but the fact that the entire client base of FXCM was deliberately deceived as to the type of service provided by the broker was enough for regulators to take the actions that they did. If the broker had been a small private operation, then the perpetrated marketing ruse may not have taken on the scale or affected as many consumers, but FXCM was a publicly traded company, where the disclosure rules and ethical behavior guidelines are taken to a much higher standard.
It must also be noted that fault was not disputed. The $7 million fine and required expulsion from dealing in the U.S. market from its New York headquarters were actually part of an agreed upon settlement of the regulator’s grievances, a lesson to be heeded by all other industry participants going forward. If you market a specific service attribute to your customer base, then it must be delivered in good faith, no bait and switch allowed. Adequate risk disclosures are also a necessity, and any attempt to downplay the risks involved will meet with swift and summary judgment.
What has happened since that fateful first week in February? The Board of Directors for FXCM immediately convened an emergency meeting after “Black Thursday”, as it has been named. FXCM Director William Ahdout and Chairman of the Board and CEO Drew Niv have resigned, although Niv will stick around until a successor is in place. The firm recently announced its interim CEO. Its client base was sold to GAIN, and the firm re-branded itself as “Global Brokerage Inc.”. Share prices have fallen by 41% and rest at $2.80, a loss of $16 million in market capitalization. Class action lawsuits have already been filed on behalf of its shareholders, as the vultures begin to circle the carcass.
The CFTC might have missed the transgression had it not been for the Swiss.
Risk management and compliance are at the heart of every corporate entity’s list of priorities. The level of effort, however, is greatly enhanced when the entity sells shares on a regulated exchange to public investors. Procedures must be in place and constantly monitored to ensure that all manner of risk is being measured and dealt with on an ongoing basis. Publicly traded companies must also abide by hefty disclosure requirements, designed to protect both shareholders and customers of the firm. If there is any appearance of deception or a deliberate attempt to withhold important information, then bells and whistles start blowing loud and clear.
When the Swiss National Bank unexpectedly removed the Swiss Franc’s peg to the Euro in early 2015, FXCM was one of the firms that was hit the hardest with conversion losses, estimated at the time to be nearly $225 million. Drew Niv, to his credit, quickly found a “White Knight” in the form of the Leucadia Capital, a hedge fund that was willing “on a handshake” to provide an emergency loan of $300 million. Leucadia, unfortunately, inherited the mess that would eventually be exposed in 2017. It, too, must now deal with angry shareholders, as well.
The CFTC and the NFA soon admonished the firm for not having adequate capital to operate. It had incorrectly assumed that Leucadia had invested new capital on the broker’s balance sheet, only to subsequently discover that the new funds were in the form of a loan. Debt is not invested capital by definition. We suspect that an audit ensued, which resulted in the following press release: “FXCM engaged in false and misleading solicitations of FXCM’s retail foreign exchange (forex) customers by concealing its relationship with its most important market maker and by misrepresenting that its “No Dealing Desk” platform had no conflicts of interest with its customers.”
In our previous article on the fate of FXCM, we also reported that, “FXCM went so far as to write internal algorithms that routed trades to a controlled entity that shared 70% of its revenues with the firm, amounting to $77 million from 2010/2014. It also concealed its interest in the market maker and filed false statements with the NFA.” The complaint contained a number of charges, but a brief summary was that, “FXCM, Adhout and Niv would be permanently barred from NFA membership, FXCM could no longer operate in the U.S., and FXCM agreed to pay a $7 million fine.”
What has transpired since that fateful “Black Thursday”?
In situations such as these, Boards must move quickly to assure the public that the firm has a future, to stop the ongoing deterioration in stock values, and to prevent a mass migration of talented staff and Introducing Brokers that feel the ship is sinking. Share values have remained flat over the last month, a good thing and a reflection of the positive steps that the FXCM Board has taken. It is important to remember that the firm was global by nature. Its U.S client base only represented 18% of its total book and operated at a loss, if recent disclosures are to be believed.
Here is a list of actions taken to date:
1) Organizational Changes
FXCM Director William Ahdout has departed the scene. Drew Niv remains at the request of the Board: “”The Company feels it is important for Mr. Niv to stay in his position during this transition period and to serve as an advisor to the newly appointed successor to assure an orderly transition.” Niv has been removed from FastMatch, a business partnership that was launched in 2012 by FXCM, Credit Suisse, and BNY Mellon, and Jimmy Hallac, a managing director at Leucadia Inc., will now serve as Chairman. The Board also appointed Brendan Callan, the acting CEO for the company’s European operations since 2010, as interim CEO.
2) FXCM, Inc. has changed its name to Global Brokerage Inc.
In order to emphasize the global nature of the firm, FXCM, Inc. has re-branded its efforts going forward and will now go by the name of Global Brokerage Inc. and trade under the symbol of “GLBR”. GLBR has offices in London, Europe, and Australia and an Introducing Broker (IB) network that spans the globe, as well. The total revenues for the global component of the GLBR business is estimated to be 82% of its original total, that being before the spin off of the U.S. customer base. Rumor has it that IBs have been jumping ship, fearful that commission structures will be revised when all is said and done. Re-branding is just one way of saying that a new and better version of the former firm will thrive and be competitive.
3) U.S. Customers have been successfully transferred to GAIN Capital.
The highly anticipated transfer of its U.S. book of accounts went off without a hitch. Headlines soon read: “GAIN Capital Transfers $142m Worth of Client Assets from FXCM”. GAIN operates the FOREX.com brand, and, according to its CEO, Glenn Stevens, “GAIN Capital Holdings successfully transferred over the weekend more than 47,000 accounts with total assets of about $142 million. We were able to smoothly migrate a sizable amount of customers under the watchful eye of our U.S regulators over the weekend, which is quite an achievement.” GAIN is now the market share leader in the U.S. market with over 70,000 accounts. The Oanda Corporation, a Canadian-based firm, is now its closest competitor. GAIN is also a global competitor and now claims “over 185,000 clients worldwide with over $1.5 billion worth of assets.” The FXCM transfer added 10% to their overall bookings.
4) Leucadia notifies its shareholders of a potential $500 million loss.
It appear that Leucadia has been left holding a very ugly bag of sorts, perhaps, a lesson that just a handshake is not a good substitute for deep due diligence. After crunching the numbers, the management team of Leucadia was forced to notify its shareholders of a potential loss of $500 million, in case things do not turn around at GLBR. Their message did have a positive spin: “While we are disappointed that these events from a number of years ago (prior to our investment) could not be resolved in a more favorable manner, we believe that, with its new leadership, the cost savings that will be realized when FXCM withdraws from serving customers in the U.S. and the vigor of FXCM’s global businesses, FXCM remains well positioned to continue to recover from past events, to grow its platform, to raise profits and margins and to increase all stakeholders’ value.”
Will GLBR survive?
One could easily make a positive argument that the new and improved version of FXCM should prosper nicely, since it has shed its loss-leading U.S. customer book of accounts. The new global entity is instantly more profitable and does not have to deal with the restrictive and burdensome regulatory environment in the United States. There is already a long and growing list of successful forex brokers that refuse to play the game in the U.S. market for similar reasons.
There is, however, a lingering cloud on the horizon, the reason why Leucadia executives are concerned about potential losses in the future. What if the FCA and ASIC follow suit and elect to punish GLBR with similar fines and orders to leave? What about litigation? The new FXCM is still a major player on the global scene. If you do the math, its global asset base is nearly $800 million, a bit more than half of the GAIN footprint. Its survival, however, will depend on how trustworthy its value proposition is perceived by existing and potentially new clients. For the time being, we will have to wait to see if more shoes drop from regulators or law firms.
FXCM is now dead. Long live GLBR, or so the story goes. Forex regulators are not happy with the escalating rise in consumer complaints in our industry. They feel compelled to do something about it, even to the extent of dethroning the reigning market share leader in the United States marketplace. This story has more legs, but the obvious question is who will be next? Stay tuned.