Instaforex sued by the CTFC

In 2011 Instaforex and one of it’s introducing brokers ZTradeFX LLC was sued by the CTFC for breaking US regulations by accepting US Clients. The Dodd Frank act prevents brokerages who do not have the adequate US regulation from accepting clients in the United States of America. However due to the fact that Instaforex parent company InstaTrade Corporation is a offshore entity based in the British Virgin Islands, InstaTrade Corporation never appeared in court and was never financially sanctioned for their breach of US regulations. 

Of course Instaforex claims complete innocence they state that it was the fault of the introducing broker. Going onto claim that the Introducing broker ZTradeFX LLC. was in fact part of their partnership program but had no active members with Instaforex. Thus meaning the complaints lodged by the CTFC were completely fictitious. However, it appears highly unlikely that the CTFC would launch legal action in a case were no US Clients had actually opened accounts with Instaforex through ZTradeFX LLC. Especially when it explicitly stated in the legal paperwork that InstaTrade Corporation would be fined $140,000 for every breach of regulation after the 23rd of October 2012. So if there had been no breaches after the 23rd Oct 2008, then InstaTrade Corporation would not have to pay any fines whatsoever.  

However as Instaforex i.e InstaTrade Corporation did not respond to the suit the NFA sanctioned Instaforex in the following way: 

TRADING PROHIBITION 09/14/2011

 

STOP SOLICITING 09/14/2011

OTHER (SEE NARRATIVE) 09/14/2011

PERMANENT INJUNCTION 09/14/2011

MAY NOT APPLY TO REGISTER 09/14/2011

FINE $140000 09/14/2011

MAY NOT OPERATE AS PRINCIPAL 09/14/2011

 

This means that Instaforex may not apply for a US licence in the future at least until the other issues in the suit are resolved. This is also makes bans Instaforex from soliciting or trading in any form within the United States of America. However, Instaforex still protests its innocence and claims that it never had any intention to operate in the US markets.  

While Instaforex is still operating and is still profitable for its offshore owners, this ruling by the CTFC and NFA will have certainly further damaged it’s already battered reputation

Brokerage News: Plus500 fined £205,128

It has come to my attention that on the 17th of October 2012 Plus500 were fined £205,128 for breaches of FSA regulation. The fines were for breaches of two different pieces of FSA regulation. The statement by the FSA is as follows: 

‘With effect from 17 October Plus500UK Ltd were the subject of a Final Notice in respect of breaches of SUP 17 and PRIN 3 and fined £205,128. The breaches involved a failure to report to the FSA reportable transactions in timely and accurate manner. For further details please contact Ken O’Donnell on 0207 066 1374 or Neil Gamble on 0207 066 1884.’ 

SUP 17, is part of FSA legislation which requires that regulated firms report certain financial transactions to the regulator. This piece of legislation is lengthy and detailed with it not being clear where exactly Plus500 slipped up. For example the opening of each CFD position must be reported in a timely manner to the FSA in the correct format including various details in accordance with SUP 17 Annex 1. It appears the Plus500 were given several warnings regarding the slow reporting of such details. With the new regulations requiring that all re-portable transactions are reported by the close of that business day. After their behavior was not modified and improved they were given a fine. 

It has been reported that Between 29 June 2010 and 5 November 2011 a total of 1,332,000 reportable transactions were undertaken by Plus500. Plus500 failed miserably failing to report any of these transactions accurately and further failed to report 189,000 of them at all. This is quite shocking and Plus500 are the first regulated firm to punished under the new punishment policy.

PRIN 3, stands for Principles 3 it seems that this behavior of Plus500 was deemed to be in breach of the general principles of the FSA. Which is probably why Plus500 were given such a large fine, however no further disciplinary action was taken against Plus500. Plus500’s fine was reduced by 30% as they co-operated fully with the FSA’s investigation. The severity of the fine suggests that Plus500’s breaches were considered to be quite severe, significantly decreasing Plus500’s overall reputation.  

Full details of the FSA’s ruling can be found here.

Broker News: Plus500 becomes ASIC Regulated

Plus500 the well known retail CFD brokerage has become regulated by ASIC the regulatory authority serving Australia. With Plus500AU Pty Ltd. being regulated by by the Australian Securities and Investment Commission (ASIC). ACN 153 301 681, AFSL Number 417727. This step allows Plus500 to accept Australian Clients to its platform and is a significant expansion for Plus500 who were previously only regulated by FSA which allowed them to accept clients from all 27 European Union countries.  

This move by Plus500 appears to make strategic sense with the Asia Pacific area being a huge growth area. By becoming regulated in Australia Plus500 will gain a much stronger footing in this area. They will also enter into the competitive Australian Contract for Difference market being yet another provider of the popular financial derivative. Providing more choice for Australian consumers. Whether Plus500 will be successful in the Australian marketplace is yet to be seen. 

The offering for the Australian market doesn’t appear to differ much from Plus500’s offering for those based in Europe. The minimum deposit is 100 Aussie dollars with there also being a 30 Dollar no deposit bonus on offer at the moment. The Australian platform appears offer more Australian shares as well as offering many of the same instruments which are available at Plus500’s European offering.  

This move into the Australian market appears to follow an underlying trend in the world of CFD’s and Forex trading, with many brokers either merging and consolidating their operations or expanding. It seems in the current market place that only brokers who are of considerable size can survive with many brokerages looking toward developing new markets as the European Contract for difference market matures. I expect to see more CFD brokers becoming regulated in Australia in order to expand into new markets in the Far East and Oceania. Made To Trade will be watching Plus500’s expansion with much interest. 

Expect to see more industry developments in the coming months.

Regulation Watch: New Zealand’s FSP

New Zealand is a relative newcomer when it comes government financial regulation and is somewhat of a unique proposition. In the latter part of 2010, New Zealand established a Financial Services Providers Register’ offering a great chance for unregulated over-the-counter brokerages, as well as new start ups to gain customer confidence by becoming registered in a well respected jurisdiction without all of the hassle of going through the costly and drawn out process of becoming regulated in many of the most respected European jurisdictions.

Back in 1995, New Zealand repealed its entire Banking Act allowing totally free entry into the field of banking and financial services provision. However, there are still several laws regulating such business but New Zealand is unique in the sense that a international banking service or financial services provider can be set up without huge capital requirements or excessive supervisory regulations. There are also very limited qualification requirements allowing almost anyone to set up such an entity. As long as the financial services provider doesn’t offer services to citizens of New Zealand, the entity is also outside the scope of the 1989 Non-Bank Deposit Taker regulations. Until recently it was perfectly possible to be registered with the FSP and not actually have any physical base within New Zealand. It is important to note that the FSP is merely a register of organisations offering financial services and that financial regulation for the finance companies operating within New Zealand is undertaken by the FMA.  

To be a properly regulated brokerage must register and be approved by the FMA, rather than just appear on the FSP list. The fact that New Zealand has a generally positive international reputation has led to a number of Far East brokerships to apply to the FSP register in order to give the company a greater air of legitimacy without having any physical link to New Zealand. However the FSP has set out a number of new provisions which prevent this and make being on the FSP register a more serious proposition. 

An FSP must now: 

  1. Have a physical office in the jurisdiction of New Zealand (virtual offices do not count). 
  2. Have a compliance officer operating in that physical office. 
  3. All client record keeping must be undertaken from the physical office in order for it possible to complete on-site inspections. 
  4. Any one on the FSP must be registered as a corporation and comply with company law. 

These requirements will be implemented over the course of 2013, and all institutions which do not comply will be informed that will either have to open a physical office in New Zealand or face having their registration revoked. At the moment being on the FSP register is pretty meaningless but after these provisions it will become a much serious thing to have. Though merely being on the FSP register will hardly be the equivalent of being a properly regulated entity even after the implementation of these provisions. So it will be interesting to see what the many FSP registered entities decide to do, I imagine a number will abandon the FSP label completely. 

Pseudo Financial Regulation: FMRC

The FMRC (Financial Market Regulations Center) is a non-commercial organisation that was created in order to provide regulation to certain Russian derivative dealers and brokers. However the FMRC is not a governmental regulatory body with financial regulation in Russia being carried out by the Federal Financial Markets Service (Федеральная служба по финансовым рынкам, ФСФР). The FMRC is no relation of the governmental regulatory body and is an independent organisation that charges its members a fee to become accredited and regulated by their organisation. 

However the Financial Markets Regulation Center has no legal powers to regulate its members. The greatest power that this organisation has is to revoke the membership of those who have opted to become certified by the organisation.  If one of its certified members doesn’t implement the decision laid down by them. The idea of such an organisation is to reassure people who opt to deposit money with Russian based contract for difference brokers. As there is no legal framework for the regulation of CFD’s in the Russian Federation, meaning that CFD providers are able to operate without regulation. 

However the scope of such an organisation is extremely limited. For example, the organisation has no power to check whether companies have been properly under taking the segeration of client funds or complying to the proper advertising standards etc. So provide scant if any protection for clients who opt to deposit funds with one of their certified brokers. It begs the question of why people would deposit funds with such unregulated entities when their is the option of depositing funds with a number of properly regulated European Brokerage houses.  

The most interesting thing about the FMRC website is the fact that you can’t see a full list of brokers who are meant to be regulated by them which is very intriguing. I see no reason why should risk their funds with a FMRC ‘regulated’ broker. Similar pseudo regulators include the ‘RAFMM‘(Russian Association of Financial Marker Members) and others.

Alpari (AFS) Ltd. announces move to Britain

Alpari Financial Services Limited, the Cyprus based arm of the Alpari group of companies has announced that it will move its client list from Cyprus to its FSA regulated London operation. Individuals who already have accounts with Alpari Financial Services limited will have until the 8th of February 2012 to either close their account or open a new account at Alpari (UK) with the funds being transferred over from their existing account. 

Chief executive of Alpari (UK), Daniel Skowronski has commented upon a number of benefits that the proposed move offers for clients, noting the significant difference between Britain’s and Cyprus’s Financial Services Compensation scheme. With Britain’s compensation scheme protecting clients fund up to the amount of £50,000, with CySec only providing compensation of up to 20,000 Euros. Which I believe is the mandated minimum set out by MiFID.  

There is speculation that the move was motivated by the fact that Alpari’s major shareholder Andrey Dashin has announced his intention of setting up a new CySec regulated broker, under the name ForexTime. With Alpari’s Nigerian website itself being either sold or rebranded as ForexTime. It is speculated that some or all of Alpari’s Cypriot employee’s may make the move to the ForexTime operation. If this is the case Alpari’s consolidation appears to make perfect sense.

There seem to a number of reasons such a move makes strategic sense. Operating two separate MiFID regulated brokerships under the same brand seems totally redundant. Due to the fact that brokers regulated in a member state of the European Union are free to operate and accept clients from all other European Union member states. Such a consolidation seems to make clear financial sense and will most likely lower Alpari’s European operational costs. 

Made To Trade’s 2012 Best Broker’s Awards

This site has been running for almost a year now and during this time I have learnt a lot about the over-the-counter financial derivative industry and have decided to give some informal awards to the providers I believe provide the best level of service in each over the counter the products covered by Made To Trade. 

Made To Trade’s 2012 CFD Broker of the Year 
Goes to GFT UK 
FSA regulated GFT UK gets my vote as the best Contract for Difference brokership of 2012. Offering a wide array of instruments with some of the most competitive spreads around GFT UK is one of the premier Contract for Difference providers in the world. GFT also provides a number of different platforms for traders to use all which function well and get the job done. GFT UK also has untarnished regulatory record and have always found everyone I have dealt with at the company to be very pleasant and helpful. You could do a hell of a lot worse than opening an account with GFT and would happily recommend them to anyone who asked my opinion. To read the full review I wrote previously Click Here
 
Made To Trade’s 2012 Financial Spreadbetting Service of the Year 
Goes to Capital Spreads 
While FSA regulated Capital Spreads provides both Contracts for Difference and Financial Spreadbetting, its efforts appear to mainly be concentrated on the Spreadbetting market. Capital Spreads provides a wide array of financial instruments for Spreadbetting and offers very competitive spreads on all the various instruments provided. The Capital Spreads online platform is a total doddle to use making it one of the best places to Spread bet online. Again similarly to GFT, every run in I have had with Capital Spreads customer services has been a pleasant experience. As far as I can tell from my research Capital Spreads has an untarnished regulatory record and thus I would recommend Capital Spreads to anyone who was looking for a good reliable financial spreadbetting service. To read a full review of the service provided by Capital Spreads please Click Here.  
 
Made To Trade’s 2012 Binary Provider of the Year 
Goes to GFT UK with an honorable mention for IG BInaries 
GFT UK has really stolen the show this year, winning two awards one for its CFD service and another for it’s Binary service. What differentiates GFT from the rest is that it’s Binaries are reflective of how proper Binary Options are priced. As opposed to the majority of the market who offer Binaries in the form of a fixed return bet. Another thing that sets apart GFT UK from its rivals is the fact that they offer the Binaries in the form of a Spreadbet or a Contract for Difference allowing them by to regulated by the Financial Services Authority of the UK. While certain improvements have been concerning the improved regulation of Binary Options (namely CySec stepping up to the plate), GFT still offers those who wish to trade Binaries the best platform and regulatory backing for those who wish to trade binaries. While the Binaries offered by GFT UK are not as simple to use as those offered by many providers, this is irrelevant as Binaries as offered by GFT make for a far superior financial instrument. To read a full review Click Here.

German Regulators shut down FXdirekt Bank

On the 21st of December 2012, BaFin the German Financial regulators took action to shut FXdirekt Bank. BaFin announced that following a period of operating losses during the course of 2012, FXdirekt Bank lacked the capital to continue to operate. This forced the regulators to put the firm into liquidation and ordered the company to cease operations, with the following notice being found FXdirekt Bank’s homepage.

‘With arrangement of 21 December 2012, the Federal Financial Supervisory Authority (BaFin), a moratorium pursuant to § 46 Section 1 Sentence 2 No. 2, 4 and 5 against the KWG FXdirekt Bank AG. Thus, the BaFin has issued over FXdirekt Bank AG to sell and stop payment. In addition, the BaFin has ordered to close the bank for the marketing of the clientele, and the Institute prohibited from receiving payments, which are not intended to pay off debts towards him (“moratorium”).

 

The demands of the customers on the FXdirekt Bank AG are protected under the Deposit Guarantee and Investor Compensation Act. The Institute is part of the compensation scheme for Securities Trading Companies (EdW). If BaFin has determined the compensation case, are the legal requirements are to ensure that the compensation scheme can compensate the customer. The EdW the creditors of the institution then shall be immediately notified. The statutory compensation claim any legitimate bank customers is limited per customer at 90% of liabilities arising from securities transactions and to the equivalent of 20,000 euros.’

 

Back in October the organisation had been the feature of an expose by the German business website Wirtschafts Woche, who accused FXdirekt of both fraud and aggressive selling practices. BaFin made no remarks regarding these accusations in their official report however and it remains to been see why the German regulator decided to shut FXdirekt Bank. Though their has been no confirmation of foul play yet. The accusations made against FXdirekt include: 

  • Aggressive selling; including encouraging customers to take up positions in particular instruments.  
  • Price manipulation; including excessive slippage market orders. 
  • Artificial demo platform which allowed brokers to coax demo users into making a trade and then gifting demo profits, to encourage the trader to deposit real money. Including add extra funds to those who were losing money using the demo account.
  • Would monitor offline accounts in order to trigger false margin calls.  
Thankfully appears that many customers of FXdirekt will get back the majority of their holdings with the company, as it was reported that broker had assets of 37 Million Euro’s with Client accounts making up 17.2 Million of that. While many will be protected by Germany’s statutory compensation scheme, I imagine that some may have in excess of 20,000 euros deposited with the institution and will seek to redeem their funds from the administrators. 

Regulation Investigation: FSC (Financial Services Commission of Mauritius)

It has come to my and many other peoples attention that a number of Forex websites have chosen to become regulated by the Financial Services Commission of Mauritius. For those who don’t know much about Mauritius, it is a well known offshore financial center with a number of tax and regulatory benefits. A number of CFD providers have made the decision to become regulated under the banner of the FSC, most notably HotForex.

The choice to become regulated in Mauritius appears to be a rather odd one, as there are many other regulatory bodies that individuals will be more familiar with, such as the FSA (soon to be defunct) and CySec etc. These European based regulatory bodies are all part of MiFID and therefore are allowed to take clients throughout Europe. This is a clear benefit and it should be noted that while different regulatory regimes within MiFID have different degrees of regulation they are all bound by certain European legislation. For example, an investment vehicle is required to be capitalized sufficiently and can receive heavy fines for breaching said regulations. I believe the minimum capitalization requirement of MiFID licensed CFD brokerage for example is 750,000 Euros, of which even the generally considered light touch of regulatory regime of Cyprus demands higher than MiFID mandated capitalization.   

I have looked through a number of the documents and legislation which underpin the FSC of Mauritius and much of the regulatory regime appears to be up to scratch. While probably not on par with many of the European regimes there is still sufficient regulation for firms operating under a capital markets licence. In fact the FSC has recently won several awards for being the most innovative financial regulator in Africa (debatable how much of an honor this really is) and it appears that the government of Mauritius has taken at least some reasonable steps to ensure there is some sound financial regulation within the jurisdiction. 

Does this mean I would feel safe depositing money with a provider that was regulated by the FSC. My answer would be yes and no. The FSC offers various types of licencing and many of the Forex firms operating under the FSC do not in fact have the more stringent capital markets licence offered by the FSC. But rather are regulated under a Global Business licence which gives the consumer far less protection and is very suggestive that the provider is actually based in another country possibly devoid of financial regulation. In fact to gain a Global Business licence one has to provide evidence that the company is operating outside of Mauritius.  

This is the case with HotForex, with the issuing of the licence not: 

not vouch{ing] – (i) For the reliability and financial soundness of the products offered or products on which the Company provides its service; and (ii) For the correctness if any statements or opinions expressed by the Company. The licence relates to services on “securities” as defined under the Securities Act 2005, and it does not authorize nor prevent the Company from providing similar services on other financial products. 

It should be noted that the kind of regulation that a Global Business licence entails is rather limited and any individual dealing with a company operating with such a licence ‘shall not be protected by any statutory compensation arrangements in Mauritius in any events whatsoever.’ 

This kind of regulation offered by an FSC Global Business licence certainly falls short of the regulation offered by MiFID members and other well respected regulatory bodies. I would be somewhat concerned about dealing with a company whose sole form of regulation was in the form of FSC Global Business licence. Having worked hard for my money, I would be unwilling to take such risks. 

What this example clearly demonstrates is that one needs to investigate the legislation and licence that a company is operating under especially if the said company is operating in an unfamiliar jurisdiction.

Pseudo Regulation: Finpotrebsouz

As Contracts for Difference are unregulated derivatives in Russia a number of Forex companies operating in Russia have taken lengths to make it appear that they are properly regulated. I have previously talked about the RAFMM which makes out that is a proper regulatory body, however in fact it is nothing but a trade association created for the convenience of its own members. All of which are owned by the same company based in the Seychelles. 

Some of the companies have now made a new attempt at appearing to be an outfit with proper oversight and regulation by becoming partners of a consumers right watchdog. The particular consumer rights group is registered a Non-Governmental Civil Rights Organisation called  защита потребителей финпотребсоюз (or in English ‘Financial Consumer Protection Union). This is simply a consumer rights watchdog which is registered with the relevant authorities in Moscow. The site claims that the organisation will look after the consumer rights when it comes to banking and other forms financial transactions. While this particular consumer rights group does have a number of notable figures on its board of members and is infact mentioned within Russian law, it does not amount to any form of regulation.

Rather its goal is to attempt to help individuals with getting the right legal advice and with the goal of protecting consumers. As well as helping the consumer shape future legislation and increased public awareness about different financial issues. It doesn’t mean that the companies which claim partnership with Finpotrebsouz have proper governmental regulation, in fact it is made very clear that Finpotrebsouz is a non governmental body. Meaning that Finpotrebsouz can infact not issue fines or undertake legal sanctions against those who partner with the organisation like a traditional financial regulator would be able to. 

Does this mean people should place more trust in Forex organisations operating out of Russia that claim Finpotrebsouz partnership? I would say no, it all it means is that the particular organisations are undertaking steps to appear more legitimate and official while still remaining unregulated.