IBFX / TradeStation Forex Ordered To Pay $600,000 Penalty For Minimum Net Capital Deficits

 

On December 10, 2014, the CFTC ordered IBFX, formerly known as TradeStation Forex, to pay a $600,000 fine for the following reasons:

  1. Failing to meet minimum net capital requirements on three occasions
  2. Failing to report a discovered net capital deficit in a timely manner
  3. Failing to supervise employees in the deployment and testing of new software

1. Failing to meet net capital requirements: IBFX failed to meet net capital requirements on the following occasions:

  1. January 31, 2012, due to uncovered forex positions
  2. January 9, 2013 due to a typographical error
  3. June 9, 2014 due to uncovered positions from new software that was not fully tested

The net capital requirements defined by the CFTC employ a formula that takes the maximum of different calculations. In this circumstance, the NFA net capital requirement rules would apply, as they are the most stringent. The NFA requires that Retail Foreign Exchange Dealers (RFED's) such as IBFX are required to carry net capital of $20 million + 5% of liabilities owed to customers. The CFTC did not advise the magnitude of IBFX's net capital deficits. The importance of net capital requirement regulation is to minimize the risk of insolvency by the forex dealer. Insolvency by dealers in the past, such as MF Global, have led to loss of account balances by retail clients, as these retail clients are considered to be unsecured creditors. 

2. Failing to report in a timely manner: The January 9, 2013 net capital deficit was immediately discovered by IBFX, but IBFX did not report the incident until Jan 11, 2013. The CFTC requires timelier reporting.

3. Failing to supervise employees: Due to the inadequacy of the software testing prior to deployment, and inadequacy of mechanisms to detect errors, the CFTC considers this a failure to properly supervise employees in the performance of their duties.

The CFTC ordered that IBFX:

  • pay a $600,000 penalty for the above regulatory failures,
  • develop an automated forex exposure monitoring system to enable real-time monitoring of forex exposure
  • implement risk management procedures regarding forex exposure
  • retain an independent third party consultant to review, evaluate and report on IBFX in support of the above

This represents the first regulatory action against IBFX, which until now has maintained a spotless regulatory record. The CFTC news release contains the full details of the regulatory action. The NFA has a record of the regulatory details for IBFX.

 

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Title: IBFX / TradeStation Forex Ordered To Pay $600,000 Penalty For Minimum Net Capital Deficits
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