NFA Fines Another Forex Firm

Includes: FXB, FXC, FXF
by: Elite E Services

As if the PFG situation (see previous articles here and here) wasn't enough, yesterday the NFA fined yet another Forex firm for:

... improperly canceling forex trades and removing profits from customer accounts, failing to timely report trade data and other required information to NFA, failing to observe high standards of commercial honor, failing to comply with NFA's Enhanced Supervisory Requirements and failing to keep accurate records.

While the event happened last year, this announcement comes at a time when customers are questioning the institutions offering market access, from MF Global, to PFG, and a recent Libor scandal. An Independent article noted "After LIBOR, where will the next scandal be?" This is particularly disturbing considering the recent trend of collapses and defaults.

Forex vs. other markets

In contrast to other markets, Forex is unique because of its decentralized nature. A stock exchange, such as the NYSE is a physical exchange (even if electronic) in a domicile country where applicable regulations and laws apply. With Forex this is the opposite (hence the name Foreign exchange) as one country currency is being exchanged for another.

Each currency has its own rules and restrictions. For example the Chinese renminbi is allowed to float only in a defined range. Major currencies such as the Canadian dollar and the British pound are generally allowed to trade freely, but are not completely without controls, as their respective central banks will attempt to manipulate the exchange rate by increasing money supply, or changing the base interest rate. In extreme cases, such as with the Swiss franc a central bank, in this case the Swiss National Bank, will intervene in a currency publicly.

A trader's perspective

So most of us agree that many institutions are not as safe as they used to be. In the current economic climate, this includes certain regions. For example a Forex broker in Greece would be more suspect than a Forex broker in the United States, based on the potential economic calamity that would entail following a Greece default or exit of the euro. In fact, the UK is most at risk than any other nation considering the Eurozone crisis, according to a recent report. Still, London is considered to be a major node in the Forex market and many other markets (if not the HUB). But if we do want to trade, we do need to open our accounts somewhere. Now in addition to trading risk, we now also face economic, regulatory, and institutional risks to our capital, which at the least should be considered by investors.

On top of regulatory restrictions, brokers and banks will place their individual trade restrictions on your account. Some Forex brokers used to decrease their weekend leverage to 20:1 or 10:1, so if a client had on Friday an open position with greater leverage, he would get a notice from the broker and if not trimmed down, the position would be automatically partially liquidated.

In the final analysis, the markets are defined by your counterparty, or where you have your account; whether it's direct with an exchange, or with another bank, or with a Retail Foreign Exchange Dealer (RFED).

Forex Risk Disclosure - Click here to read

The risk of loss in trading foreign exchange markets, also known as cash foreign currencies, or the FOREX markets, can be substantial.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.