CFTC sues FXCM over prior capital shortfall, customer guarantees

NEW YORK (Reuters) - The U.S. Commodity Futures Trading Commission on Thursday said it filed a civil lawsuit against retail broker Forex Capital Markets LLC FXCM.N, saying it was under-capitalized in January, 2015, and failed to report its capital shortfall in a timely manner.

Euro, Hong Kong dollar, U.S. dollar, Japanese yen, British pound and Chinese 100-yuan banknotes are seen in a picture illustration shot January 21, 2016. REUTERS/Jason Lee/Illustration

New York-based FXCM is the largest U.S.-based retail foreign exchange broker, with approximately 200,000 customers worldwide and 88,000 in the United States.

The complaint, filed with the U.S. District Court for the Southern District of New York, also said FXCM guaranteed against customer losses, by “zeroing out negative customer balances,” which is a CFTC violation.

CFTC rules explicitly prohibit a retail currency dealer such as FXCM from representing it “will guarantee customers against loss, limit the loss of customers, or not call for or attempt to collect security deposits, margin, or other deposits of customers.”

FXCM was not immediately available for comment.

The case stemmed from the Swiss National Bank's sudden move on Jan. 15, 2015 to scrap its cap on the value of the Swiss franc against the euro EURCHF=. The SNB move caused the euro to suffer its biggest-ever one-day fall against the franc, dropping 18 percent for the session and losing some 30 percent on an intraday basis.

FXCM and other brokerages were hit hard by the SNB decision as client losses left the New York-based company with very little capital. The company announced on Jan. 16, 2015 that it lost more than $200 million as a result of the SNB’s action.

CFTC alleged in its complaint that FXCM capital became “illegally undercapitalized” on Jan. 15-16, 2015. Based on CFTC regulations, FXCM’s capital requirement is $25 million.

FXCM eventually informed the National Futures Association and the CFTC that it had a shortfall of at least $200 million, but only after the NFA and the CFTC initiated contact.

FXCM eventually got a $279 million loan from Leucadia National Corp LUK.N under "unfavorable terms," the complaint said.

In its lawsuit, the CFTC is seeking payment of civil penalties to be determined by the court.

In after-hours trading, FXCM was up 2.6 percent at $10.22.