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Friday, January 16, 2015

Swiss move to scrap currency cap hits forex brokers

Swiss move to scrap currency cap hits forex brokers


Plunging Swiss sends Franc warning

Plunging Swiss sends Franc warning
A MAJOR US currency broker said it suffered “significant losses” that wiped out its equity and a New Zealand foreign-exchange trading house failed as the fallout from the decision by the Swiss National Bank to cease capping the nation’s currency spread across the world.
FXCM Inc, the biggest retail foreign-exchange broker in Asia and the US, said in a statement that due to unprecedented volatility in the euro against the Swiss franc, its losses left it with a negative equity balance of around $US225 million and that it was trying to shore up its capital.
“As a result of these debit balances, the company may be in breach of some regulatory capital requirements. We are actively discussing alternatives to return our capital to levels prior to today’s events and discussing the matter with our regulators,” the company, which has a market capitalisation of around $US701.3 million, said in a statement. Shares of the company fell 15 per cent in US trading and tumbled another 12 per cent after hours.
The Swiss National Bank’s move overnight to ditch its cap on the Swiss franc’s exchange rate against the euro, a move that unleashed new volatility among bonds and currencies around the world.
The abandonment of the cap, which had essentially pinned the currency at 1.20 francs per euro for the past three and a half years, prompted a collapse of as much as 30 per cent in the euro versus the franc — the biggest single-day move in a developed market traders could recall.
Earlier, small New Zealand currency trading house Global Brokers NZ Ltd said it would close its doors as it could no longer meet regulatory minimum-capitalisation requirements of $NZ1 million.
The company said the SNB’s decision resulted in rare volatility and illiquidity in the currency market. “Both our primary and backup liquidity providers became unresponsive or illiquid for hours after the event,” said the company, whose shareholders are listed as being based in the British Virgin Islands.
The majority of the company’s clients in a Swiss franc position were on the losing side and sustained losses far greater than their account equity, the statement said.
“Losses incurred on trades that could not be exited due to illiquidity were losses incurred directly with the liquidity provider and we do not have the ability to reimburse those,” Global Brokers said.
Canadian-based currency house OANDA, which has offices in Australia, 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.
Tom Williams, foreign-exchange analyst at Go Markets, said the currency markets were stunned by the SNB’s decision and further fallout is possible. Illiquidity in the Swiss franc market has meant there is widespread uncertainty about where the currency actually traded against a number of crosses. The is some risk that trades will be revised, leaving some currency brokers exposed.
“There are a lot of questions surrounding where things actually traded,” Mr Williams said. “That might be the next hurdle to cross, but as we speak people are just trying to pick up the pieces.”
Wall Street Journal
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