Forex brokers suffer escalating losses after Swiss ditch franc cap / FINANCIAL TIMES.

Forex brokers suffer escalating losses after Swiss ditch franc cap

FT Reporters / http://www.ft.com/intl/cms/s/0/a1d0ca62-9d37-11e4-adf3-00144feabdc0.html?siteedition=intl#slide0

Last updated: January 16, 2015

Foreign exchange brokers across the world reported escalating losses on Friday as the shockwaves from Switzerland’s decision to scrap its currency ceiling against the euro reverberated through the industry.

Brokers in New York, London, Europe and New Zealand issued a steady stream of warnings, with the UK’s Alpari entering insolvency. In New York, Leucadia National, owner of investment bank Jefferies, agreed to provide a $300m cash lifeline into FXCM after the New York-based currency broker said it may be in breach of capital requirements. “We could not be more grateful to Leucadia and its team for their rapid and effective response and to our regulators,” said Drew Niv, FXCM chief executive. Citigroup is the largest prime broker to FXCM, with potentially tens of millions of dollars of credit extended to the struggling company.

Overall, Citi has incurred a $150m loss as a result of the Swiss franc’s appreciation, on a par with losses at Deutsche Bank. Barclays has lost close to $50m, traders said. All the banks declined to comment.

The losses came as the franc soared as much as 39 per cent against the euro on Thursday after the Swiss National Bank stunned markets by abandoning its ceiling against the euro, first put in place in 2011.

The pressure on companies such as Alpari could leave thousands of retail investors who have flocked to currency trading in recent years facing heavy losses. Such brokers allow traders to use high levels of leverage on currency bets.

Raj, 33, a London-based photographer and amateur commodities trader who has used Alpari since 2009, said he currently has about £24,000 trapped in his account at the firm.

“It was completely out of the blue, a total shock,” he said. “I’ve never had any issues with them. I’ve been calling and I just keep getting their answerphone.”

Traders say hedge funds and global banks that dominate the currency market may be nursing bigger losses. A major question for the currency market and global regulators is just how far the fallout extends, given the sheer scale of the Swiss franc’s appreciation.

Some hedge funds that borrowed Swiss francs to buy higher yielding assets in other currencies now owe substantially more in US dollar or euro terms.

An executive at one US hedge fund said: “This is a very annoying thing to have happened.”

Philippe Ferreira, head of research at Lyxor, said: “Some managers will face some losses if they used the franc as a funding currency, but these will not be large.”

Data from Lyxor, which tracks $288bn of hedge fund assets, showed that so-called global macro funds were 2 per cent net short the Swiss franc, a very small amount compared to their exposure to other currencies.

The market volatility resulting from the Swiss National Bank’s decision prompted heightened regulatory scrutiny of the retail brokerage sector.

The US Commodity Futures Trading Commission and the National Futures Association announced on Friday that they would be carrying out a review of FXCM.

The CFTC, along with the NFA, regulates currency brokers in the US. The NFA has also been in close contact with FXCM and the CFTC to monitor the situation, said a spokesperson.

FXCM was just one among many retail brokers hit hard after the SNB withdrew its three-year floor for the euro against the franc.

Retail forex brokers have seen rapid growth in recent years as improvements in technology and the emergence of instant news sites such as Twitter broadened access to the market. Some, such as Alpari and FxPro, have sponsored shirts of football teams. Many have focused on London, which is the world’s main hub for trading forex for institutional investors.

However, they have attracted criticism for offering investors vast levels of leverage on their bets, a multiple that allows customers to trade far in excess of the deposit they post. The venue acts as the counterparty to the trade, taking on the risk.

Swissquote, the online broker, said on Friday it would activate a provision of SFr25m ($28.5m) as the Swiss National Bank’s decision “left clients with a negative balance”.

Denmark’s Saxo Bank warned its customers they could lose out from a review of Thursday’s trading. “Once we are better able to establish true market liquidity, all executed fills will be revisited, and will be revised and amended to more accurate levels,” it said. “This may result in a worse execution rate than the originally filled level.”

New Zealand-based broker Excel Markets said it had sustained the total loss of its operating capital following the SNB announcement, and would not be able to resume business. Interactive Brokers Group said because of the sudden move in the value of the Swiss franc several customers suffered losses in excess of their deposit with the firms. “Such debits amount to approximately $120m, less than 2.5 per cent of our net worth,” it said.