Financial Conduct Authority, the UK forex watchdog, is planning to bring about some new measures that could prove to be very hard to implement for a lot of forex brokers located in London. According to sources with intelligence on this subject, FCA has expressed its intention to a number of UK based forex brokers about prospective amendments to the regulatory conditions through a letter.
According to the letter, the UK regulator is considering to obligate straight-through processing (STP) forex brokers to obtain full market maker license. FCA clarifies that this action necessary to ensure the brokers ability to make up for negative balances resulting from possible client losses due to unexpected market volatility.
Some officials in the UK has been warning that STP is inadequately capitalized to cover negative balances of the clients. My followers know the importance of negative balance protection since I have been indicating it as one of the most important criteria while choosing a forex broker.
Negative Balance Protection
To remind you, FXCM was one of the biggest victims of the abrupt decision of Swiss National Bank (SNB) to cease defending 1.20 floor for EURCHF.
The decision sent shockwaves throughout the industry resulted from clients’ negative balances after sudden plunge of EURCHF. The pair lost more than 4000 pips in few minutes and sunk thousands of clients’ account into negative balance.
FXCM managed to survive through arranging a credit line worth of $300 million while Alpari closed its UK branch due to the $20 million of capital shortfall. It seems to me that FCA is worried that STP brokers’ capital strength is not going to be sufficient enough to cover negative balances in case of another unanticipated disaster.
If FCA goes ahead with its plan and forces STP brokers to upgrade their licenses, this leaves two options for the brokers; either to adhere and upgrade their licenses or abandon retail forex market in the UK.