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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 announced that it was "in breach of some regulatory capital requirements." On January 16, FXCM announced that it had secured a $300 million loan with a 10% coupon from Leucadia National Corp in order to meet its capital requirements. On January 20 further terms of the loan were released, showing that the coupon rate might rise to 17% and that asset sales 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.

By 2005 the online retail forex market began to grow, though it was commonly considered a risky market, full of fraud and speculation. Critics of the industry said that few retail traders could 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."

The "dealing desk" or market-maker system of trading with customers created distrust for retail forex traders. Customers could only trade directly with their brokers who took the opposite side of the trade. Whenever the customer profited, the broker would lose money, creating a conflict of interest. In 2007 FXCM began using the "no dealing desk" system of trading stating that all customer trades were made with independent market-makers and that there would be no conflict of interest between FXCM and their customers.

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 $20 million 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.

FXCM went public in December 2010, raising $211 Million in its IPO. In its IPO prospectus, FXCM described its no dealing desk trade execution.

When our customer executes a trade on the best price quotation offered by our FX market makers, we act as a credit intermediary, or riskless principal, simultaneously entering into offsetting trades with both the customer and the FX market maker. We earn fees by adding a markup to the price provided by the FX market makers and generate our trading revenues based on the volume of transactions, not trading profits or losses.

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.

FXCM was founded in 1999, and was privately held. Refco supplied startup capital, taking a 35 percent stake in FXCM two years before Refco went bankrupt.

In May 2010, FXCM acquired ODL, a British forex broker that was also a platform for contracts-for-differences and spread betting.

These products now trade on the firm's U.K. subsidiary, FXCM, Ltd.

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

On January 16, 2015, wild swings in the Swiss franc that took place after the Swiss National Bank suddenly removed the cap on the currency's value resulted in losses that left FXCM with a negative equity balance of about $225 million. Trading in FXCM’s shares on the New York Stock Exchange was shut down, but the stock price dropped more than 80% in the premarket. Three days later, FXCM received a $300 million rescue package from Leucadia National, the parent company of the investment bank Jefferies, that allowed it to continue operating.

Later in January 2015 FXCM filed a stockholder-rights plan making it harder for anyone to take control of the company. The plan gave each shareholder the right to buy a new class of stock if someone else accumulates more than 10 percent of the firm. Holders of the new shares are entitled to 1,000 times the dividend on common stock, according to the filing. If a merger takes place, they could receive 1,000 times the purchase price. This would discourage someone from trying to buy the company on the open market.

On March 25, 2015 FXCM said it had agreed to sell its Japan business to a brokerage unit of e-commerce giant Rakuten Inc. for $62 million, as part of its effort to sell noncore assets to repay its debt.

Rakuten Securities will continue to use the FXCM trading system for legacy FXCM Japan clients.

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

The same year it continued its overseas expansion and opened offices in France and Australia.

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

In each quarter of 2014, between 67% and 70% of FXCM open customer accounts lost money.

On February 5, 2017 the National Futures Association (NFA) banned FXCM and Drew Niv, William Ahdout and Ornit Niv from NFA membership and the Commodity Futures Trading Commission banned FXCM from trading in the U.S. after finding that they received $77 million in kickbacks from an undisclosed affiliated market maker which was taking positions opposite its customers.

The NFA found that Niv and Ahdout engaged in "deceptive and abusive execution activities" and provided misleading information to the NFA.

FXCM also agreed to pay a $7 million fine and it will begin offloading its US accounts to GAIN Capital Holdings Inc for an amount yet to be determined.

FXCM, Niv and Ahdout didn't admit or deny the findings.

FXCM had legal difficulties throughout its existence. The 2005 Refco bankruptcy took years to sort out.

In the years following, 2006-2010, the firm failed to pass on profits generated from price movements between the time orders were placed and executed, while any losses were passed on to clients in full.

This practice, known as "asymmetric price slippage" led to a series of fines, including a $14.2 million fine by the CFTC in 2011 and a £4 million fine assessed by the U.K. Financial Conduct Authority in February 2014. The FCA also forced FXCM to compensate its UK retail customers with £6m for profits that have been withheld.