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Security and Due Diligence

CFTC and Segregated Accounts

In a recent CFTC press release dated 2012-01-05, FXOpen Investments Inc. has been fined $120,000 for basically soliciting US clients and operating as a Retail Foreign Exchange Dealer (“RFED”) between 2010-10-18 and 2011-01-26, without being registered with the CFTC.

Link here.
CFTC Press Release_2012-01-05_FXOpen fined
Apart from how the civil penalty is going to be enforced on a foreign entity, if FXOpen has no interests or assets in the US, and by the very nature of the order itself limiting the future interaction with US clients, why would FXOpen give a hoot? This, however, is not my point.

Take note of:

“In the forex market, entities known as RFEDs or Futures Commission Merchants (FCMs) may buy forex contracts from, or sell forex contracts to, individual investors. Under the CEA and CFTC regulations, an entity acting as an RFED or FCM must register with the CFTC and abide by rules and regulations designed for investor protection, including those relating to minimum capital requirements, recordkeeping, and compliance.”

All this is very good, that would mean my CFTC-registered RFED/FCM would have to “abide by rules and regulations designed for investor protection, including those relating to minimum capital requirements, recordkeeping, and compliance.”

And for a US national or resident, to trade at a CFTC-registered RFED/FCM, you have to acknowledge a CFTC Risk Disclosure.(I imagine at the time you sign up for your account, or digitally acknowledged after.)
CFTC Risk Disclosure

Hang on a second…

(3) YOUR DEPOSITS WITH THE DEALER HAVE NO REGULATORY PROTECTIONS.

All of your rights associated with your retail forex trading, including the manner and denomination of any payments made to you, are governed by the contract terms established in your account agreement with the futures commission merchant or retail foreign exchange dealer. Funds deposited by you with a futures commission merchant or retail foreign exchange dealer for trading off-exchange foreign currency transactions are not subject to the customer funds protections provided to customers trading on a contract market that is designated by the Commodity Futures Trading Commission. Your dealer may commingle your funds with its own operating funds or use them for other purposes. In the event your dealer becomes bankrupt, any funds the dealer is holding for you in addition to any amounts owed to you resulting from trading, whether or not any assets are maintained in separate deposit accounts by the dealer, may be treated as an unsecured creditor’s claim.

Why the half-measure? If the RFED/FCM is to already comply with the “rules and regulations designed for investor protection”, why not have it mandated that segregated accounts are to be kept? It’s a one-liner. Yes, ‘may’ is used as in, ‘may’ co-mingle with operating funds, and ‘may’ be treated as an unsecured creditor, but why leave it in the hands of the RFED/FCM to decide with the client in the RFED/FCM-client contract?

Another point to note is that, it is unlikely your current contract with your US broker even has these terms, so it might be prudent to do your due diligence and get something in writing from them.

Edit:
This is something you want to be seeing pertaining to the segregation of your funds.
Saxo Capital Markets_Segregation and Client Funds
Saxo Capital Markets_Segregation and Client Funds

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