IBFX, Inc., a Commodity Futures Trading Commission registered Retail Foreign Exchange Dealer and Swap Dealer, resolved charges brought both by the CFTC and the National Futures Association that it failed to meet minimum capital requirements from January 15, 2015, through February 5, 2015, and did not immediately notify each regulator of its failure, as required. According to each regulator, IBFX’s failure resulted from the unexpected decision of the Swiss National Bank to no longer maintain the Swiss franc at a fixed exchange rate with the Euro on January 15, 2015, and the subsequent collapse in value of the Swiss franc. As a result, customers of an IBFX affiliate, IBFXAU Australia Pty Ltd., sustained losses of approximately US $4 million that IBFXAU then owed to but did not pay to IBFX. However, IBFX did not fully recognize this shortfall, as well as the fact that it was actually undercapitalized by as much as US $9 million during the relevant time, until it completed its month-end reconciliation for January 2015. As a result, charged both regulators, IBFX did not notify the CFTC and NFA that it failed to maintain minimum capital requirements during the relevant period until February 5, 2015. In addition, NFA charged IBFX and Herbert Walton, IBFX’s chief compliance officer, with IBFX’s failure to adopt and implement “effective procedures to adequately monitor the firm’s compliance with applicable SD regulatory requirements” and with failure to take reasonable steps to ensure IFBX implemented an adequate risk management program. To resolve the CFTC’s complaint, IBFX agreed to pay a fine of US $1 million. However, to resolve NFA’s charges, IBFX also agreed to withdraw its NFA membership by March 30, 2016. NFA’s complaint against Mr. Walton was dismissed with prejudice.
Compliance Weeds: Both RFEDs and futures commission merchants have numerous ongoing reporting and ad hoc notification requirements to the CFTC and their designated self-regulatory organization. Events triggering notice requirements typically require filings within very short time periods. For examples, FCMs are required to provide immediate notice to the CFTC and the firm’s DSRO if they do not meet their minimum capital requirement; when a carried omnibus account must be liquidated or transferred due to its failure to meet a margin call; if an account is under margined by an amount greater than the FCM’s net capital; when customer funds held by the FCM are less than the amounts required to be held; and various other circumstances. Notification requirements for certain other events are on the same day, within 24 hours or within two business days. RFEDs and FCMs must be aware of all events requiring notice filings with the CFTC and their SRO as well as the timing requirement for any necessary follow-up. Although sometimes firms only discover an event requiring an immediate or prompt notice filing after a notice-filing deadline, a bad situation should not be made worse by unnecessarily delaying a required filing following a late discovery. (Click here for a chart of FCM ongoing and notice requirements, and here for a chart of RFED ongoing and notice requirements.)