Wrapup 5: Swiss franc shock shuts some FX brokers; regulators move in

Global Brokerage

18/01/2015 21:12

(Repeats story published late Friday; no changes to text) 
    By Anirban Nag and Steve Slater 
    LONDON, Jan 16 (Reuters) - The Swiss franc shock 
reverberated through currency trading firms around the world on 
Friday, wiping out many small-scale investors and the brokerages 
that cater to them and forcing regulators to take a closer look 
at the sector. 
    Some major banks also lost out when the Swiss National Bank 
scrapped its three-year-old cap on the franc against the euro 
 EURCHF=EBS  without warning on Thursday, including Britain's 
Barclays  BARC.L  which lost "tens of millions" of dollars, an 
industry source said.  ID:nL6N0UV2ZK  
    Retail broker Alpari UK filed for insolvency on Friday, 
while New York-listed FXCM Inc  FXCM.N , one of the biggest 
platforms catering to online and retail currency traders, said 
it looked to be in breach of regulatory capital requirements 
after its clients suffered $225 million of losses.  
    FXCM had to turn to Leucadia National Corp  LUK.N , the 
parent of investment bank Jefferies, to quickly broker a $300 
million loan that was expected to close Friday afternoon. 
 ID:nL1N0UV0ZT  
    In the past 15 years, retail currency trading has grown 
quickly, attracting individuals staking their own money with 
long trading hours, low transaction costs and the ability to 
take on huge risks for a relatively small sum. 
    Retail currency trade makes up nearly 4 percent of global 
daily spot turnover of nearly $2 trillion, the latest survey 
from the Bank of International Settlements shows, having grown 
from almost nothing in the 1990s. 
    This small share means the sector poses limited risk to the 
financial system but retail brokers are much more vulnerable to 
big losses than banks. Regulators in New Zealand, Hong Kong, 
Britain and the United States said they were checking on brokers 
and banks after reports of volatility and losses. 
    The move "caused by the SNB's unexpected policy reversal of 
capping the Swiss franc against the euro has resulted in 
exceptional volatility and extreme lack of liquidity," Alpari, 
the shirt sponsor of English Premier League soccer club West 
Ham, said in a statement. 
    "This has resulted in the majority of clients sustaining 
losses which exceeded their account equity. 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." 
   <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 
    FACTBOX-Swiss franc shock takes toll on retail FX brokers 
 ID:nL6N0UV1F2  
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> 
    Online trading services provider London Capital Group 
Holding  LCG.L  put its franc-related losses at up to 1.7 
million pounds ($2.6 million). 
    The franc surged as much as 40 percent to a high of 0.8500 
per euro  EURCHF=EBS  after the Swiss central bank lifted its 
1.20 per euro cap.  ID:nL6N0UU2CQ  
    New Zealand foreign exchange dealer Global Brokers NZ Ltd 
closed due to hefty losses. The national Financial Market 
Authority said it would "be seeking assurances that the client 
funds have been protected and segregated".  ID:nL3N0UV28K  
    The Hong Kong Monetary Authority said it was "following up 
with the banks on their practice in this regard ... to 
understand the implication, if any, but we would not comment on 
the situation of individual banks." 
    Britain's Financial Conduct Authority said it was talking to 
Alpari, while the U.S. National Futures Association said it was 
monitoring the foreign exchange brokers it oversees. 
     
    BROKER WOES, REGULATORY POWERS 
    FXCM Inc  FXCM.N  shares fell nearly 90 percent in 
pre-market hours before being halted for the regular trading 
session on the New York Stock Exchange. In after-hours action, 
it resumed trading  FXCM.K , rebounding from the premarket 
losses, but still down 70 percent from Thursday's close.  
    Top executives from FXCM went through company books until at 
least 5 a.m. EST (1000 GMT) on Friday, according to a source 
close to FXCM. Regulators were in FXCM's offices in downtown 
Manhattan on Friday, according to two sources.  
    A spokesperson for the U.S. National Futures Association 
said it was in "constant" contact with FXCM, and had been 
"watching the volatility" as a result of the Swiss central bank 
move. NFA rules allow a leverage ratio of 50 to 1 on 
transactions in the Swiss franc, which means even a 2 percent 
move can wipe out a position. 
    Not all brokerages suffered. GAIN Capital Holding Inc 
 GCAP.N  said on Friday it generated a profit on Thursday from 
trading, and that its strong financial position will allow it to 
win market share. Its shares closed up 2.9 percent at $8.52. 
    Canada-based foreign exchange broker OANDA said in a 
statement it "will pardon our clients' negative account balances 
associated with this market event" and would not "re-quote or 
amend" clients' trades on the Swiss currency.     
    But Denmark's Saxo Bank, one of the biggest players in 
retail foreign exchange trading, said late on Thursday it would 
potentially set different rates for its clients' transactions. 
 ID:nL6N0UU52W  
    Saxo Bank chief financial officer Steen Blaafalk told 
Reuters some clients had suffered losses but the bank was well 
capitalised. Retail investors, some of whom face huge losses, 
protested when Saxo said it might set different rates.  
    Lawyers said this could be contested. 
    "I think there will be litigation and disputes over 
automatic close-outs," said a financial services lawyer. 
    Hong Kong media reported clients of HSBC Holdings  HSBA.L  
were able to buy the Swiss currency at below-market rates for 
several hours through its online system, making several thousand 
dollars in profits on the trades. 
    HSBC said online foreign exchange trading for the Swiss 
franc "is currently operating normally and we will investigate 
reports that customers could trade at old rates initially after 
the cap was lifted." 
 
 (Additional reporting by Michelle Chen, Andrew Winterbottom, 
Huw Jones, Alasdair Pal, Lincoln Feast Elzio Barreto and Jessica 
Toonkel; Editing by Ruth Pitchford, David Gaffen and James 
Dalgleish) 
 ((anirban.nag@thomsonreuters.com; +44-20-7542-8399; Reuters 
Messaging:anirban.nag.thomsonreuters.com@reuters.net)) 
 
Keywords: SWISS SNB/BROKERS