Friday, January 16, 2015

Fallout From Swiss Move Hits Brokers, Banks



Fallout From Swiss Move Hits Brokers, Banks

FXCM Gets Rescue Package; Deutsche Bank, Citigroup Lose Tens of Millions

Brokers around the world are crumbling in the wake of the Swiss National Bank’s shock decision to remove the cap on its currency. WSJ's Tommy Stubbington reports. Photo: EPA.
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Fallout from Switzerland’s wildly swinging currency ricocheted around the world, triggering the collapse of some brokerage firms and hitting global banks with tens of millions of dollars in losses.
A major U.S. currency broker reached a deal for a rescue package following sharp customer losses after the Swiss National Bank abruptly removed the cap on the Swiss franc’s value , sparking a massive rally. Elsewhere, a U.K. retail broker entered insolvency and a New Zealand foreign-exchange trading house collapsed.
Meanwhile, Deutsche Bank AG and Citigroup Inc. both suffered about $150 million in losses, according to people familiar with the matter. Barclays PLC also racked up tens of millions of dollars in losses, although they totaled less than $100 million, another person said.
The losses were triggered by the Swiss franc’s 30% jump against the euro in the minutes after the SNB scrapped its cap on the nation’s currency relative to the euro. Brokers found themselves unable to trade because of the unexpected volatility and the fact that some big banks stopped quoting rates for francs. Their customers’ huge losses, partly fueled by large quantities of leverage, which allows clients to stake large sums with relatively little cash, quickly eroded the brokerages’ financial cushions, tipping some into insolvency.
Regulators from around the world scrambled to assess the damage, seeking information from banks and brokerages and trying to ascertain the potential impact on mom-and-pop investors.
FXCM Inc., the biggest retail foreign-exchange broker in the U.S. and Asia, reached a deal late Friday for a $300 million rescue package from Jefferies Group LLC that will allow it to meet its regulatory capital requirements and continue operations.
The firm has said in a statement a day earlier that the unprecedented volatility in the euro against the Swiss franc triggered losses that left its customers owing the broker about $225 million and that it was trying to shore up its capital.
FXCM’s shares were off 70% to $3.83 in Friday’s after-hours trading following the news of the financing package, bouncing back slightly from the more than 85% premarket drop. The stock didn’t trade in the regular session, pending the financing announcement.

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For Deutsche Bank, Citigroup and Barclays, the losses stemmed at least in part from their traders’ portfolios of options tied to the Swiss franc, according to traders and other banking officials. The value of those options is directly tied to the level of market volatility and the Swiss franc exchange rate. The sudden change in those two factors caused immediate losses for the banks, these people said. While representing large single-day losses, they are unlikely to have a major long-term impact on the banks.
Citigroup, for its part, is one of the biggest prime brokerages for FXCM. On Friday afternoon, Citigroup and other brokers were waiting to see if the Jefferies rescue would go through. A Citigroup spokesman declined to comment.
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Global Brokers NZ Ltd., which is registered in New Zealand, said it would close its doors as it could no longer meet regulatory minimum-capitalization requirements of 1 million New Zealand dollars ($782,500). “Losses incurred on trades that couldn’t be exited due to illiquidity were losses incurred directly with the liquidity provider and we do not have the ability to reimburse those,” the company said, blaming the SNB’s move.
Regulators in Hong Kong and New Zealand said they were in touch with banks and brokerages about the situation.
In the U.K., retail broker Alpari Ltd. said it had entered insolvency. “Where a client cannot cover this loss, it is passed on to us. This has forced Alpari (UK) Limited to confirm…that it has entered into insolvency,” the firm said. Fellow U.K. broker IG Group PLC said it was facing a negative impact of up to £30 million ($45.7 million) after the “sudden and extreme movement” in the franc.
WSJ's Michael Casey discusses the impact of Switzerland’s central bank decision to eliminate a cap on the franc-euro rate on the U.S. dollar. Photo: Getty
To prevent losses from spiraling out of control, investors and trading firms often put automatic buy or sell orders in place when currencies move a lot. But the very large jump in the Swiss franc happened so fast that everyone tried to close out their trades at the same time. Liquidity disappeared, making it impossible to execute the trades and allowing losses to spiral upward.
Brokers “couldn’t possibly have covered [these positions] because the market moved instantaneously,” said Mirza Baig, head of Asia FX and interest rate strategy at BNP Paribas in Hong Kong. “There was no liquidity in the market at the stop loss level,” he said referring to orders that are triggered once a currency breaches certain levels
Trading in foreign exchange markets averages $5.3 trillion a day, according to the Bank for Intentional Settlement’s most recent central bank survey from April 2013. Swiss franc transactions account for average daily volumes of $275 billion.
The trading losses occurred within minutes of the Swiss central bank’s announcement. Because major currencies rarely move more than 1% or 2% in a short period, investors are able to borrow large sums to juice their bets. Traders can put down $50,000—or even less—and make a bet worth $1 million or more. Excel Markets, which is connected to New Zealand’s Global brokers NZ, advertises 400 times leverage. The downside: a small adverse move can lead to a wipeout.
When the Swiss bank’s decision was announced, the euro fell almost instantaneously from 1.2009 Swiss francs a euro to 1 with barely any opportunity to trade in between. From there, it hit 0.9750 and then 0.85 before rebounding somewhat.
‘I’ve been in the market 30 years and have never seen anything like it. Clients that lost money can blame us, or they can blame themselves.’
—Saxo Bank CFO Steen Blaafalk
That meant anyone who had bet on the euro to rise, with insurance in the form of a sell order at or around 1.20, was stuck. It also means that any retail brokers whose systems still appeared to offer the ability to buy or sell at those incremental levels, couldn’t deliver those rates in reality.
Denmark-based Saxo Bank A/S, which offers trading in a number of financial products to retail customers, wrote to clients saying it was taking a fresh look at all its clients’ franc trades Thursday, and “this may result in a worse execution rate than the originally filled level.”
“I think it was a fair way of dealing with it,” said Steen Blaafalk, CFO at Saxo Bank. “The move was just so extreme. I’ve been in the market 30 years and have never seen anything like it. Clients that lost money can blame us, or they can blame themselves. We have always helped and guided them on their risk management of the Swiss franc and warned of the risk.”
Retail currency house OANDA also said it suffered losses amid “vanishing liquidity” in the market. It said it forgave all negative client balances that were caused when traders couldn’t close out positions quickly enough.
—Lucy Craymer, Chiara Albanese, Christopher Whittall, Ewen Chew, James Glynn, Telis Demos and Christina Rexrode contributed to this article.
Write to Anjani Trivedi at anjani.trivedi@wsj.com, Tommy Stubbington attommy.stubbington@wsj.com, David Enrich at david.enrich@wsj.com and Katie Martin at katie.martin@wsj.com
Corrections & Amplifications
FXCM said Thursday’s unprecedented volatility in the Swiss franc triggered losses that left its customers owing the retail foreign-exchange broker about $225 million and that as a result, it might be in violation of capital requirements. An earlier version of this article incorrectly reported that FXCM said its equity was wiped out and that the broker itself had a negative equity balance of about $225 million.

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