By Anjani Trivedi, Tommy Stubbington, David Enrich and Katie Martin
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 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 late Thursday 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. "As a
result of these debit balances, the company may be in breach of
some regulatory capital requirements," the company said.
The firm's shares didn't open for trading Friday on the New York
Stock Exchange pending news of the rescue and plunged 70% when
resuming in the after-hours session.
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.
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 GBP30
million ($45.7 million) after the "sudden and extreme movement" in
the franc.
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.
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 at tommy.stubbington@wsj.com, David Enrich at
david.enrich@wsj.com and Katie Martin at katie.martin@wsj.com
Write to Anjani Trivedi at anjani.trivedi@wsj.com, Tommy
Stubbington at tommy.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.
Write to Anjani Trivedi at anjani.trivedi@wsj.com, Tommy
Stubbington at tommy.stubbington@wsj.com, David Enrich at
david.enrich@wsj.com and Katie Martin at katie.martin@wsj.com
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