By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) - Forex Capital Markets LLC's deal to take over the foreign exchange business of futures brokerage giant Refco Inc. should help shore up the flagging reputation of the online retail currency industry, FXCM's chief executive officer Drew Niv told Reuters in an interview.
Refco on Friday agreed to sell some of its retail foreign exchange assets to online currency broker, Forex Capital Markets, in a deal worth $110 million.
Forex Capital Markets is registered with the Commodities Futures Trading Commission (CFTC) and is a member of the National Futures Association. It has about 500 employees and had posted $154 million in gross revenue last year, said Niv.
Refco, a brokerage that filed for bankruptcy last month amid a financial scandal, said it was selling 15,000 retail client accounts of its foreign exchange arm, Refco FX, as well as Refco's 35 percent share in Forex Capital Markets.
The additional 15,000 clients would make FXCM the largest retail currency broker with about 80,000 customers and a notional daily trading volume of between $10-15 billion.
"The Refco collapse has put a black eye on the (online retail FX) industry. There's just a lot less trust in the big players. That's an unfortunate thing," Niv said.
He noted that by doing this deal, FXCM is protecting the reputation of the online foreign exchange industry by "demonstrating that there are strong, responsible forex firms able to stabilize the industry in difficult times."
Niv also outlined key areas that FXCM would have to change in Refco's FX business in order to restore credibility to the industry.
He noted that while the Refco Group is a regulated entity, unit Refco FX was not registered with the CFT. This was one of the main reasons a lot of institutional clients were unable to withdraw their money from the company when it went bankrupt, he added.
"So going forward we will only do it on a regulated basis. We will move customers to a regulated entity."
FXCM is also seeking partnerships with huge financial institutions to guarantee the funds, Niv said, and these companies will become company shareholders.
REFCO'S HEDGE FUND CLIENTS
With respect to Refco's hedge fund clients, Niv said it has no immediate plan to take over those accounts because it would require a lot of money.
According to industry sources, nearly $2 billion in hedge fund money have been stuck with Refco since the company went bust.
"Refco would need a big bank to take over those hedge fund accounts. Something big has come and rescue them," said Niv.
The deal, which could close within 30 days, includes cash, the assumption of certain customer account liabilities, and forgiveness of certain debt owed to FXCM, Refco said.
Niv said Refco FX's takeover would not involve any layoffs.
When the deal closes, all retail customer positions and orders traded on the Refco RX Web site RefcoFX.com will be transferred intact, Refco said.
The deal is subject to approval by the U.S. Bankruptcy Court overseeing Refco's Chapter 11 case.
"A purchase will liberate their customers from the bankruptcy proceedings and give them full access to their funds," Niv said.
At the moment, Refco FX clients are not permitted to withdraw funds in their trading accounts.
But on completion of the sale, Refco FX account holders will be able to carry out all normal account procedures, such as depositing funds and trading with them.
On Thursday, a bankruptcy judge approved Refco's sale of its futures brokerage, Refco LLC, and other assets in a deal worth $1.25 billion. The asset sales will help Refco pay off the $16.8 billion it owes creditors.
The company went public in August and collapsed in October amid a financial scandal involving its chief executive, Phillip Bennett, who was suspended from the company and arrested on charges of securities fraud. (Additional reporting by Michael Flaherty)
(email from RefcoFX)
November 11, 2005
Dear RefcoFX Client:
We wanted you to know about an important step in Refco's Chapter 11 filing. Refco F/X Associates LLC (RefcoFX) has signed a Memorandum of Understanding (MOU) to sell certain of our retail FX assets to Forex Capital Markets LLC ("FXCM"). FXCM is a Futures Commission Merchant registered with the CFTC and a member of the National Futures Association.
The MOU provides for the transfer of more than 15,000 retail client accounts of RefcoFX.com, including yours, to an affiliate of FXCM.
Under the terms of the MOU:
Pending completion of a transaction, RefcoFX clients may continue trading in their accounts without disruption, and
Upon completion of a transaction, all retail customer positions and orders traded on the FX Trading Station platform will be transferred intact, and RefcoFX account holders will be made whole, have access to 100% of their funds, and be able to carry out normal account procedures, including withdrawing funds, as usual.
We believe this is the first step in ultimately normalizing trading. The MOU must be approved by the Bankruptcy Court, and the sale of the business will occur through a court-supervised auction open to competing bids. Thus we expect the process to take approximately 30 days to complete.
We appreciate your continued support during this process. Refco has set up a toll-free information line (866-327-0774) to answer additional questions you may have. You may also visit the RefcoFX website, www.refcoFX.com, where you can find additional information about the Chapter 11 restructuring.
We will continue to update you as more information becomes available.
Refco F/X Associates LLC