GAIN Capital & FXCM – New Swap Dealers in Town

In their 10K reports, both FXCM and GAIN Capital reported that they have registered as Swap Dealers with the NFA. The registration is part of ongoing compliance with Dodd Frank regulations and reflects the continual adjustments that is taking place among financial firms to adapt to the new rules. In the case of FXCM and Gain, both firms became required to register as swap dealers due to their activities with their Institutional FX divisions.

However, neither firm provided much in the way of specifics as to why they registered. Explaining the matter, Felix Shipkevich, Managing Principal of Shipkevich PLLC said, “the issue here is if the CFTC will issue formal guidance on whether it characterizes rolling FX spot contracts with ECPs as swaps.” As a result, firms are taking a precautionary stance until a full clarification of the laws will be announced, with both firms citing that it is ‘unclear’ what the impacts will be.

From FXCM:

FXCM Registration as a Swap Dealer could subject the Company to additional Regulation Regulation Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority ( Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority ( Read this Term and compliance requirements which could materially adversely affect its business and financial condition. Recently adopted rules under the Dodd-Frank Act have established a comprehensive new regulatory framework for the derivatives markets generally. In response to the Dodd-Frank rulemakings that further defined “swap”, we conducted an in-depth review of the products offered by the firm and, as a precautionary measure, applied for registration as a Swap Dealer on a provisional basis with the NFA on December 31, 2012. The impact of registration as a Swap Dealer on the Company remains unclear. However, additional regulation and ongoing compliance of any kind may carry additional expense and new challenges for our management team and may have a material adverse effect on our business and financial condition. We will continue to monitor the applicability of the rules to the firm’s existing business practices.

At GAIN:

The Dodd-Frank Act also provides for additional regulation of swaps and security-based swaps, including some types of foreign exchange and metals derivatives in which we engage. The Dodd-Frank Act requires the registration of swap dealers with the CFTC and imposes significant regulatory requirements on swap dealers. Certain of our subsidiaries may be required to register, or may register voluntarily, as swap dealers. Effective February 27, 2013, GAIN GTX, LLC, became registered with the CFTC and NFA as a swap dealer. Swap dealers are subject to a comprehensive regulatory regime with new obligations for the swaps activities for which they are registered, including adherence to Risk Management Risk Management One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, Read this Term policies, supervisory procedures, trade record and real time reporting requirements as well as proposed rules for new minimum capital requirements. Swap dealers also are subject to additional duties, including internal and external business conduct and documentation standards with respect to their swap counterparties. Swap dealers also will be subject to new rules under the Dodd-Frank Act regarding segregation of customer collateral for cleared transactions, position limits, large trader reporting regimes, compensation requirements and anti-fraud and anti-manipulation requirements related to activities in swaps. The specific parameters of these swap dealer requirements are being developed by the CFTC and other regulators. The full impact of the regulation on GAIN GTX and any other of our subsidiaries that register as a swap dealer remains unclear. It is likely, however, that these entities will face increased costs due to the registration and regulatory requirements listed above. Complying with the proposed regulation of swap dealers could require us to restructure our businesses, require extensive systems changes, require personnel changes or raise additional potential liabilities and regulatory oversight. Compliance with swap-related regulatory capital requirements may require us to devote more capital to our GTX business. The increased costs associated with compliance, and the changes that will be required in our OTC and clearing businesses, may adversely impact our results of operations, cash flows, or financial condition. The extraterritorial impact of the swap dealer rules also remains unclear.

Overall, the lack of clarity on what the final interpretations of Dodd Frank rules are is similar to the Y2K bugs. We won’t really know the effects until all the rules are set to be implemented.