NFA Fines Interactive Brokers $250k for Retail FX, Supervisory Failures

Interactive failed to heed a warning issued in May 2021, NFA says.

The broker also ignored a directive from NFA until three months after deadline.

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The fine is for allegedly cancelling its retail customers forex orders and failing to adequately supervise its employees in the conduct of their forex activities on behalf of the firm.

These actions, the self-regulatory organisation (SRO) said, violated the NFA Compliance Rules 2-43(a)(1) and 2-36(e), respectively.

NFA Compliance Rule 2-43(a)(1) in pertinent part “prohibits Forex Dealer Members (FDMs) from cancelling an executed customer order or adjusting a customer account in a manner that would have a direct or indirect effect of changing the price of an executed.”

On the other hand, the NFA Compliance Rule 2-36(e) requires the associations FDMs—which Interactive Brokers became in 2012— to “diligently supervise their employees and agents in the conduct of their forex activities for or on behalf of the FDM.”

NFA announced the fine on Thursday in a statement published on its website. It added that the decision was reached by its Business Conduct Committee (BCC).

BCC made the decision based on a complaint it had issued against Connecticut-based Interactive Brokers and a settlement offer submitted by the broker in which it neither admitted nor denied the allegations, the regulator further said.

Background to the Allegations

According to NFA, on October 30, 2020, Interactive “burst” some of its retail customers' forex transactions after it had “auto matched” the customers' orders, citing Rule 2-43(a)(1)(ii) of its compliance rules, and arguing that it used the straight-through processing exclusively.

NFA Compliance Rule 2-36(s)(5) defines “straight-through processing” as when a FDM automatically executes (without human intervention and without exception) an offsetting position to a customer order with another counterparty prior to providing an execution to the customer order.

NFA said it warned the firm in a May 10, 2021, letter that it could not depend on the provision “since the firm did not operate exclusively utilizing straight-through processing” when it 'auto-matched' customers' orders.

“A member of Interactive‘s compliance department sent NFA an e-mail on May 10, 2021 confirming the firm had received the letter. NFA also spoke to the same staff member the next day, who did not disagree during the call with NFA’s position,” NFA said in the filing seen by Finance Magnates.

Despite this warning, however, NFA said Interactive approximately two months later “submitted a daily report that reflected the firm had cancelled transactions in the USD/CAD pair on July 19, 2021, involving eight customer accounts.”

This step, the watchdog said, again contravened its rule it had earlier brought to the brokers attention.

“Despite NFA bringing the cancellation issue to Interactive‘s attention in May 2021, the firm did not take prompt remedial action to ensure it did not violate NFA’s forex requirements,” NFA wrote in the filing.

On Interactives supervisory failure, NFA said under its Compliance Rule 2-36(e), Interactive is required to diligently supervise its employees and agents in the conduct of their forex activities for or on behalf of the company.

In an October 6, 2021 letter to Interactive, NFA said it had directed the firm to provide adjustments—totalling less than $20,000— to the customers adversely affected by the improper July 2021 trade cancellations.

However, despite not objecting to or disagreeing with the directive, NFA said Interactive did not obey the directive until January 25, 2022—more than three months after the deadline.

As a result of this, NFA said Interactive did not ensure that it complied promptly with its directive and, therefore, had failed to adequately supervise its employees to ensure compliance with its relevant requirements.

2022: NFAs Fines So Far

In late March, NFA slammed fines of $275,000 and $250,000, respectively, on introducing brokers, Coquest Inc, and Marex Spectron International Limited (Marex), for their compliance and supervisory failures.

According to the BCCs complaint file on Coquest seen by Finance Magnates, NFA had alleged that Coquest, among other things, violated the NFA Bylaw 1101 by doing futures business with an affiliate, the Woodbine Group, that was not an NFA Member.

On the other hand, Marex allegedly allowed unregistered individuals to act as associated persons without registering as such.