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.
ENLARGE
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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Thursday, January 15, 2015

Tech leaders lining up behind Elizabeth Warren BY JOE GAROFOLI


Tech leaders lining up behind Elizabeth Warren

BY JOE GAROFOLI
San Francisco ChronicleJanuary 14, 2015 
Warren-Netroots Nation
U.S. Sen. Elizabeth Warren, D-Mass., waves to the crowd after her introduction at the Netroots Nation conference in Detroit, Friday, July 18, 2014.
DAVID COATES — AP
Technology has been credited with helping President Obama, then an upstart senator, defeat Hillary Rodham Clinton and win the presidency 2008.
Now, a group of tech leaders who worked on his campaign are lining behind another upstart who could challenge Clinton in 2016: Sen. Elizabeth Warren, D-Mass.
They are quietly tapping Silicon Valley talent to join Tech for Warren, a coalition of digital natives who are trying to convince voters that Warren is the best candidate. But first they will have to convince Warren, who has repeatedly said she is not running.
The latest “no’s” from Warren came Tuesday in a Fortune magazine interview with her friend Sheila Bair, the former chairwoman of the Federal Deposit Insurance Corp., and in an e-mail to The Chronicle from her press secretary, Lacey Rose.
“As Sen. Warren has said many times, she is not running for president,” Rose wrote.
To the true Warren believers – including those in Tech for Warren – the key word in that statement is the word “is.” As in Warren currently is not running but perhaps could be persuaded.
“It doesn’t change anything,” said Erica Sagrans,who served as Obama’s digital campaign director for northeastern states in 2012. Sagrans now works as a campaign manager of Ready for Warren, which is helping organize Tech for Warren. “We exist to convince her to run.”
Last month, more than 300 Obama campaign alums signed an open letter asking Warren to run, and the left-leaning online hub MoveOn.org said it is ready to spend $1 million on the progressive favorite.
Even if the tech world can’t persuade Warren to run, her backers hope their efforts will challenge Clinton to take more liberal positions.
“If Warren jumped in, then what I like to call the ‘progressive tech wing' would have a voice in the primary,” said Tim Wu, a Columbia University professor and Warren supporter who coined the term “net neutrality.”
Tech for Warren is expected to formally roll out a list of its members in the next few weeks. Its ranks already include Obama’s key tech advocates, including his 2012 campaign’s chief information officer, Rajeev Chopra.
Having the same operatives who helped the Obama campaign twice succeed using technology could help convince Warren that she has a chance against the better-funded and better-known Clinton campaign, her boosters believe.
“It would show her that there is a group of people out there who are ready to jump in and really make something happen,” Chopra said.
Early members of Tech for Warren say the campaign already reminds them of Obama’s efforts.
“I’m calling 50 to 100 people right now,” said Sean Knox, a San Franciscan who was Northern California data director for Obama’s 2008 campaign. “She speaks to me in the same way that Obama did when he first ran.”
Like many in the group, Knox said he was attracted to Warren because she has taken on Wall Street executives and talked about the nation’s income inequality like few other politicians. Last month, a nine-minute video of Warren pointedly criticizing Citicorp’s inordinate influence in Washington went viral with more than 600,000 views on YouTube.
The tech crowd favors Warren because she, like many of them, is seen as disrupting the status quo in Washington.
“Tech people see themselves as that outsider, disrupting force that likes to speak truth to power,” said Catherine Bracy, a San Franciscan who was director of the Obama campaign’s tech field office in San Francisco in 2012. “And that’s what she is like, too.”
It won’t be easy. Clinton hasn’t formally declared, either, though her supporters are preparing for her to announce her candidacy this year. A group called Ready for Hillary raised $12 million in 2014, according to the nonpartisan Center for Responsive Politics. One of the nation’s largest left-leaning super PACs, Priorities USA, is being chaired by Obama 2012 campaign manager Jim Messina, and has begun raising money for the former secretary of state.
But Warren’s Silicon Valley supporters say that with a little tech help, the Massachusetts senator could put a scare into Clinton.
“This is obviously a treasure trove of tech talent here” in Silicon Valley, Bracy said. “They’re just waiting to be asked.”

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Russia Just Made A Bold Move To Keep Its Gas Leverage On Europe

Russia Just Made A Bold Move To Keep Its Gas Leverage On Europe

  • JAN. 15, 2015, 7:30 AM
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russia gas europeRussia TodayA look at all of the pipelines in the area, including the scrapped South Stream pipeline and the planned Black Sea pipeline.
On Wednesday Russia's announced that it will shift all its natural gas flows to Europe via Turkey, instead of Ukraine, reports Bloomberg News.
"...the Turkish Stream is the only route along which 63 billion cubic metres of Russian gas can be supplied, which at present transit Ukraine. There is no other way," the head of Gazprom Alexei Miller said.
The European Union's energy chief said that this would hurt Russia's reputation as a supplier, and the European Commission's VP for energy union said that the decision makes no economic sense, according to Bloomberg.
However, the move makes sense when considering that Russia has been increasingly losing its control over the European gas market after changes in European policy and warmer winters.
Now Europe will be forced to link up to Russia's planned energy pipeline to Turkey — or it will lose Russian gas. 
 "Our European partners have been informed of this and now their task is to create the necessary gas transport infrastructure from the Greek and Turkish border," Miller added in a Gazprom statement.
It is unclear what the project will cost Russia (or Europe), although the new deal includes terms stating that Turkey will receive a 6% discount on gas imports for 2015.
Kremlin-funded RT says Moscow will use funds and materials intended for the original South Stream project to build the new Black Sea pipeline.

putinREUTERS/Umit BektasRussia's President Vladimir Putin addresses the media during a news conference at the Presidential Palace in Ankara December 1, 2014.
Europe Forced The Hand

Back in 2009 the European Union passed the Third Energy Package, which said Russia could not both own and control pipelines on the EU territory. (Russia filed a lawsuit with the World Trade Organization against the EU over this in April, after the first rounds of Western sanctions.)
Europe has also been putting taxpayers’ money into new inter-connectors between countries dependent on Russia gas imports.
What that means is that if Russia ever cut off gas to a European county, that could could still get gas from somewhere else because there were more gas pipeline connections.
This was a major strategic move by European because Russia has had a history of cutting off gas.
So now that Russia will be shifting natural gas flows through Turkey instead of through Ukraine, it appears that Europe will need to build the necessary gas transports to connect to Turkey and integrate the pipeline into the inter-connectors system.
The Economist also cites the following changes in Europe: 
  • Lithuania started importing liquefied natural gas from Norway.
  • Ukraine is importing more gas from the West.
  • The EU has brokered a deal on debts and prices between Ukraine and Russia, which will keep gas going to Ukraine at least for the first quarter of 2015.
To cap things off, in December lack of funds forced Russia to cancel the South Stream pipeline to supply gas to Europe without crossing Ukraine.
europe gasREUTERS

Russia's Hegemonic Control Over Gas In The Past

Back in late November, Putin coolly noted that "winter is coming," and thus he was "sure the market will come into balance again in the first quarter or toward the middle of next year."
What he meant by that was that cold weather is great news for the Russian economy because Europeans would have to import more oil and natural gas.
"It is the power of colder weather that allows Russia, as the key supplier of energy to Europe, to apply leverage. That leverage can take the form of higher prices, restricted volumes, a combination of both, or negotiations that directly or indirectly affect these additional costs," Cumberland Advisors Chair David Kotok wrote in August.
Russia provided one-third of the natural gas that European countries relied on both for heating their homes and running industries. Because Russia played such a huge role in the gas market, it was able to command high prices.
But the European winter is pretty mild this year, The Economist notes, so "even if Russia did try to interrupt supplies, the effect would be modest."

Russia's Future Game Plan Outside Of Europe

Russia has been publically exploring energy (and military) relationships with countries outside of Europe — most notably China and India.
In May, Russia's Gazprom and China National Petroleum Corp. (CNPC) signed a historic 30-year contract to supply natural gas to China.
Screen Shot 2015 01 14 at 7.33.30 PMREUTERS
Putin met with India's Prime Minister Narendra Modi near the end of 2014, and they agreed to several energy deals. Russia invited India to "work on projects" in the Arctic. 
"Rosneft and Gazprom, our biggest companies, together with their Indian colleagues, are preparing projects for the development of Russian-Arctic [and] the expansion of liquefied gas," Putin said. 


NOW WATCH: 11 Facts That Show How Different Russia Is From The Rest Of The World


 

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Shocked by the Swiss Franc? Blame Europe

<p>Beware of the black swan.</p> Photographer: Fabrice Coffrini/AFP/Getty Images
BEWARE OF THE BLACK SWAN.
 PHOTOGRAPHER: FABRICE COFFRINI/AFP/GETTY IMAGES

EUROPEAN ECONOMY

Shocked by the Swiss Franc? Blame Europe

7 
By 
Anyone feeling wrong-footed by the Swiss central bank's surprise decision to stop holding down the price of its currency should consider placing part of the blame elsewhere -- on the abject failure of Europe's leaders to revive their sinking economy.
Global financial markets went into gyrations today after the Swiss National Bank announced that it would end its more than three-year effort to keep the value of the franc from rising above about 0.83 euro. The franc immediately jumped to about 0.96 euro, dealing a blow to the country's export and tourism industries, to traders who had bet against the currency and to foreigners who owe money in francs.

Franc20150115

Switzerland's move is a kind of capitulation. With the European Central Bank on the verge of extraordinary stimulus measures that will probably weaken the euro, Swiss central bankers realized that the franc -- long a haven for investors fleeing the euro -- will come under renewed upward pressure. A voluntary appreciation now, they believe, will be less disruptive than one that's forced on them later.
Tiny Switzerland's travails underline the bigger issue: Europe's inability to restore economic growth. After the 2008 financial crisis and amid the subsequent European debt crisis, Europe's leaders -- Germany's policy makers, especially -- have erred repeatedly. They have forced too much austerity on the weakest members of the currency union, while the strongest have pared back investments needed to boost growth. They have been far too slow in forcing banks to recognize losses, raise capital and get back to business as usual. They have opposed much-needed monetary stimulus. As a result, the euro area has endured serial recessions and is now teetering on the brink of deflation.
It's widely believed that the ECB is finally about to start quantitative easing, announcing what could be as much as a trillion euros in bond purchases. A possible legal obstacle fell away this week. Whether or not QE works, it will put new pressure on foreign-exchange markets, as the outlook for interest rates in euros increasingly diverges from the rest. Switzerland is not alone in feeling the repercussions. The U.S. dollar has gained some 14 percent against major currencies since mid-2014 -- a shift that some economists worry could spell trouble for non-U.S. companies that have trillions in outstanding dollar-denominated debt.
Europe's leaders -- and particularly German Chancellor Angela Merkel -- can still make a difference by boosting investment, offering relief to embattled countries such as Greece and letting the ECB do its job. They should do this for the sake of their own economies. If they fail, the damage won't be confined to the EU.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.



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Banking Hearing on Income Inequality

Banking Hearing on Income Inequality

SEP 17, 2014

Senator Elizabeth Warren's Q&A at a September 17, 2014 Banking Subcommittee on Economic Policy hearing entitled, "Who is the Economy Working For? The Impact of Rising Inequality on the American Economy."

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Swiss Currency Has Shot Up 15% So Far Today. Here’s Why That Matters


Swiss Currency Has Shot Up 15% So Far Today. Here’s Why That Matters

A Swiss coin is seen beneath a euro banknote on Januay 15, 2015 in Lausanne. In a shock announcement on January 15, Switzerland's central bank said it was ending a three-year bid to artificially hold down the value of the Swiss franc against the euro, in a move that immediately sent the safe haven currency soaring.Fabrice Coffrini—AFP/Getty Images

Chaos in the currency market is a sign of deep problems for Europe—and the whole global economy.

The global economy got a lot more interesting today, and maybe a little more scary, when the Swiss National Bank ended its commitment to a fixed exchange rate between the Swiss Franc and the euro.
Currency markets went into a frenzy. The Swiss franc immediately rose 30% in value against the euro, mirrored by a spike in its U.S. dollar value. Some of those gains have pulled back, with the currency up about 15% at midday. That’s still a huge move.
Okay, so it’s been a big day for currency traders—and anyone planning on a ski trip to the Alps. But what’s this mean for me?
The wildness in the market underscores the big economic story of the moment: Europe’s slide toward a recession. In a globally connected economy, weak demand in Europe could weigh on the recovery in the U.S.
So what exactly happened?
Swiss francs rose because the Swiss central bank removed an artificial cap on the price of an asset people really, really want right now. The import of the story is less about the sudden price change today than about why people want to trade their euros for francs in the first place.
Switzerland isn’t a part of the eurozone, the group of countries that share the euro as a currency. Swiss assets denominated in Swiss francs have long been considered a safe haven—a parking spot for investors around the globe when they are feeling jittery.
The eurozone has given people a lot be jittery about. In the wake of the Greek debt crisis at the beginning of the decade, investors jumped into francs, strengthening the currency against others. The problem with that for the Swiss is that it makes the goods produced by Swiss companies more expensive to export. So the Swiss National Bank (that’s like their Federal Reserve) capped the value of a franc at 1.20 per euro.
It also decided to start charging negative interest rates, meaning investors in effect have to pay a fee to park their money in a Swiss bank. That’s another way of fighting currency overvaluation. Today, at the same time as it cut the currency peg, the Swiss bank lowered the short-term interest rate from -0.25% to -0.75%. That is, they raised the penalty for stashing money there. Even so, the rally in francs shows there remains a lot of demand for doing just that.
Why did the Swiss cut the exchange rate peg?
The surprise move comes as Mario Draghi, president of the European Central Bank, is considering new measures to stimulate the eurozone economy. Many investors expect the ECB will take a page from the U.S. Federal Reserve and start buying long-term debt to push down long-term interest rates, a strategy known as quantitative easing.
A euro QE is broadly expected to bring down the value of the euro compared to the U.S. dollar. The Swiss, it seems, didn’t want to tie the value of its own currency so closely to the policy makers at the ECB.
“Recently, divergences between the monetary policies of the major currency areas have increased significantly – a trend that is likely to become even more pronounced,” the Swiss central bank said in a statement. “The euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified.”
Pity Swiss watchmakers, though. Their timepieces just became more expensive for foreigners to buy.


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