Many government officials and regulatory bodies have taken a great deal of heat over the past few years for one simple reason – after the recent financial crisis and the Great Recession that followed, not one single banker was put behind bars or held accountable for the global financial destruction. Yes, there were a few fines handed out here and there to large banking firms, but the amounts of those fines, when compared to the profits and cost to the public, were miniscule, almost rounding errors in some instances.
Yes, new regulations and laws have been passed to prevent a recurrence of bad business practices that led to the crisis, but most of these attempts have been watered down or blocked at all costs. Our greedy bankers have continued to operate in their old ways, reaping huge profits and paying enormous bonus compensation, as if nothing had ever transpired. Bankers may have created clever PR programs that posited that they had reformed internally, but stories of rogue traders, the active global banking casino, and the fixing of key financial rates are evidence that nothing has really changed.
The mindset of our regulators, however, has definitely changed. There is a new aggressiveness afoot. They have no intention of being embarrassed again by the banking and brokerage communities around the globe. Sitting on their hands is not an option, and it is not only the CFTC that has gotten more proactive and resolute. The other major regulatory bodies around the planet are making headlines daily in their own respective regions of operation, providing blacklists of potentially fraudulent websites, jailing crooks for misdeeds, and assessing enormous fines on major banking establishments that are setting records.
“Never again!” may be the rallying cry heard within the walls of these agencies, but here is a brief update of recent rulings and activities that have been promulgated, many outside and independent of the goings on at the CFTC:
Cyprus Securities and Exchange Commission (CySEC)
Cyprus officials have received a double-dose of attention over the past few years. Contagion from the continent in the form of Greek bonds was the foremost factor that created the crisis that gripped this island community and financial center in 2013. The two largest banks on the island had invested heavily, well beyond prudent limits, in Greek bond securities. When the bonds were devalued, both banks struggled to survive, but neither was able to raise sufficient capital to weather the devaluation. Regulators stepped in, closed both banks, and seized deposits. The second bank was shut down, and the first was re-capitalized. Details are still being worked out.
Over the past decade, Cyprus had become a haven for financial service companies, especially those in forex and digital options. Foreign brokers that had set up back-office operations on the island were wise enough to keep client deposits offshore in Tier-1 banks, far from seizure and local operating needs. Many of the local firms were not so lucky. In many cases, only small percentage portions of their cash positions were refunded, limited by local law and the consortium deal that had been struck with outside parties to bail out the government. The good news is that Cyprus has recovered, well ahead of benchmarks set by contract. The bad news is that many firms had to close their doors or be bought out by other better-capitalized brokerage companies.
In the wake of this crisis, the spotlight fell upon CySEC. The verdict was that the agency had been far too lax, and, as a result, more stringent licensing and operating standards were adopted into law, and more resources devoted to enforcement actions. New rules require segregation of client deposits from operating capital and establish guidelines for order executions. Not a month goes by that CySEC does not speak to other practices that it deems inappropriate and not in the spirit of existing law. The latest attack is on the practice of giving welcome or gift bonuses, not communicating on an ongoing basis as to the exact amount earned and available for withdrawal, and then charging exorbitant fees for processing a withdrawal request.
IronFX, one of the more prominent brokers on the island, claims to be in compliance, but it notes in a statement that it does not know about other firms or if they are fully compliant: “We view the proposed changes as positive in clarifying the subject of bonuses, and such extra regulations are in line with our expectations. There will be no real change in the way we conduct business, as we are already compliant. We are not aware of which brokerage firms will be affected, but we are sure that any such brokers will make the necessary changes, where applicable, to meet the requirements set by CySEC.” Surviving brokers on Cyprus are now cleaning up their acts.
Financial Conduct Authority (FCA)
Major regulatory bodies like to pursue high-profile cases for a number of reasons. When big banks or brokers are involved, then the press has a field day, thereby notifying anyone with criminal intent, including organized crime, to stand down or making the general public more aware that fraud is omnipresent, even at high levels in our financial infrastructure. The FCA is the regulator in the UK, and, in many cases, works “hand-in-glove” with their regulatory brethren in the U.S. and in Europe. The two big cases on their plate, along with U.S. regulators, involve the fixing of LIBOR and foreign exchange rates within the trading departments of major global banks.
The former case, the one to do with LIBOR rates, does impact forex, as well as markets in interest rate derivatives contracts. As reported by LeapRate, “This misconduct involved at least 29 Deutsche Bank individuals including managers, traders and submitters, primarily based in London but also in Frankfurt, Tokyo and New York.” In April, the FCA stepped forward to assess fines on Deutsche Bank totaling £227 million ($340 million), the largest fine ever laid down for LIBOR related misconduct. On the same day, a host of U.S. regulators followed suit with enormous fines, as well. The total from the FCA, CFTC, and others hit the $2.5 billion mark. Deutsche Bank had a bad day.
As for forex rate fixing, U.S., Swiss and British regulatory authorities delivered fines amounting to $4.3 billion at the end of last year to JPMorgan Chase & Co, Barclays, RBS and Citigroup. The banks involved are presently negotiating for lower settlements, but this story has miles to go before it sleeps. Class actions will surely follow, and cases against specific individuals are proceeding with charges to be filed later in 2015.
Autorité des Marchés Financiers (AMF)
In France, there is not a financial center that approaches the level of London or Frankfurt, but the AMF, its financial watchdog, is determined to protect French citizens from fraudulent schemes perpetrated by unlicensed, foreign-based forex brokers. It has published its own “blacklist”, which can be viewed on its website (a Google-based search will provide a translation). In the past month or so, it has added 14 names to its list. Each of these companies operates outside of the European Union, but their French-speaking personnel have repeatedly solicited unsuspecting French citizens for deposits, while blocking attempts to withdraw any funds.
The latest blacklisted firms are Bancde Options, Bclays Markets, Gainsy Forex broker Company, GFS Securities Ltd, Globstate Assets Holdings Limited G.M.E Ltd, Consomatrade Ltd, iTrade Capital Markets Ltd, Mutual Broker, Original Markets Ltd, Prime Financial Management Services, Solution Capital Limited, Strategie Solution Ltd, and UBT Forex Ltd. In a similar action, the FCA added these three names to its list: Ebor Option, GMT Markets, and KSFTrade.
Other Global Regulatory Issues of Note – BitCoin
For many, the digital currency revolution is upon us. Investment companies are throwing millions of dollars into this arena in hopes that the next great idea might appear or from fear that they might miss the train as it leaves. There are several of these digital currency ventures, but the one that has gained the greatest traction and following is BitCoin. Many forex and digital option brokers have added BitCoin to their offering in some way, but regulators have been slow to acknowledge its existence or provide rules for banks to follow in order to add it to today’s payment systems.
The result has been a mixed bag across various local and national jurisdictions. The various systems are driven by what is called “blockchain” technology that encrypts all features, prevents fraudulent payments (although there have been a few very sizable losses during its infancy), and assures anonymity, a trait that troubles regulators while appealing to the criminal elements in our society. One central bank, the Reserve Bank of Australia, has chosen to ignore the phenomenon, recently stating, “The bank’s judgment is that the current very limited use of digital currencies means that they do not raise any significant concerns with respect to competition, efficiency or risk to the financial system.” Until critical mass is achieved, regulatory costs seem to outweigh any benefits.
As a general rule, non-U.S. regulatory authorities have traditionally looked to the United States, as the financial services capital of the world, for guidance in pertinent regulatory issues. If there were something to worry about, then it more than likely would occur first in the U.S. and then spread to other markets. U.S. laws and regulations have then provided a convenient roadmap for others to follow and adapt to their respective local market conditions. Those days ended with the Great Recession and the breakdown in regulatory oversight the world over. Global coordination is still on the table, but more aggressive and proactive efforts on a local basis are now on that same table.
More regulation is a good thing for worldwide forex traders, but this fact does not mean that we have total peace of mind and can ignore our own responsibility to be vigilant at all times. Remember that the Bernie Madoff Ponzi scheme stole billions in the most heavily regulated market and city on the planet! We must always keep an eye open for the possibility of fraud in any given financial situation. Foreign brokers that cross over national boundaries without authorization still pose an enormous threat. The legal community still has no good way to protect your rights in a foreign jurisdiction. For the meantime, check in from time to time with your local regulator’s website for guidance and advice. They work for you and in your best interest, day and night, “24X7”.