Gain Capital plays catch-up with FXCM

The forex arms race is officially on, as leading forex brokers gear up for increased capital requirements and industry consolidation.

The ink was barely dry on FXCM’s agreement with its banks to increase its credit facility by nearly $100 million to $250 million, and now comes word that rival retail forex broker Gain Capital is creating some dry powder of its own. Gain Capital (NYSE:GCAP), parent of Forex.com and Gain GTX, has announced that it is planning to raise $65 million (and possibly up to $75 million) via an offering of convertible notes.

Why all the capital raising? Well, a few reasons, but mainly:

  1. Increasing capital requirements – Forex brokers are facing increasing capital requirements in several jurisdictions around the world, forcing brokers to basically park money in a number of geographic spots. Staged implementation of Basel III requirements will soon supersede the capital requirements of individual country financial regulators, especially in Europe, forcing forex brokers to post increasing amounts of capital. Those with access to more (and cheaper) capital will have a distinct competitive advantage, another reason pushing brokers such as Plus500 and KVB Kunlun to go public.
  2. Cheap cost of capital – Share prices of retail forex brokers such as FXCM, Gain Capital, and Plus500 has risen nicely lately, making equity-related issuance an attractive alternative. Combining that with historically low interest rates makes now a great time to raise that ‘dry powder’ and be prepared for whatever opportunities or challenges arise.
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