Best Forex Brokers: Swiss shock — Two FX brokers fail, FXCM teeters
Foreign exchange broker Alpari UK announced Friday that it had entered insolvency following the Swiss National Bank’s (SNB) shock decision to drop its three-year-old peg of 1.20 Swiss francs per euro. Meanwhile, shares in U.S. retail forex broker FXCM (FXCM) fell 88 percent in premarket trading after it said its clients’ losses threatened the firm’s capital. The stock was ultimately halted just before markets opened, and at least two brokerages slashed their rating on the stock.
Managers of the investment firm Leucadia were on site at FXCM as of late Friday morning, sources told CNBC, as that firm considered a $300 million investment in the embattled forex broker.
Rich Repetto, Sandler O’Neill principal, told CNBC’s ” Squawk on the Street ” Friday that this “may be the event of the year when you talk about market movements.” “We do think they will do everything from a debt perspective and if it has to be equity, it’s going to be highly dilutive given that the tangible book value is at 313 (million dollars) prior to these customers losses,” he added.
Repetto also said that leverage numbers need to be reexamined by regulators to help prevent these types of reactions in the future. The FXCM saga intensified just hours after Alpari’s collapse. “The recent move on the Swiss franc caused by the Swiss National Bank’s unexpected policy reversal of capping the Swiss franc against the euro has resulted in exceptional volatility and extreme lack of liquidity,” Alpari UK said in a statement. “This has resulted in the majority of clients sustaining losses which has exceeded their account equity. Where a client cannot cover this loss, it is passed on to us.” Read More Stunned: Swiss banks, watchmakers hit hard The company said that, as a result, it had entered into insolvency, adding that retail client funds would continue to be segregated in accordance with FCA rules. This came after New Zealand brokerage Excel Markets also announced that it was unable to resume business following the SNB’s move.
“Both our primary and backup liquidity providers became unresponsive or illiquid for hours after the event,” the brokerage said in a statement. “The majority of clients in a franc position were on the losing side and sustained losses amounting to far greater than their account equity. When a client cannot cover their losses it is passed onto us.” FXCM said Thursday evening that clients owed it $225 million and that it may be in breach of some capital requirements. The stock was halted for pending news Friday morning, though the nature of that news was not immediately clear.
Futures regulator NFA said it was in constant contact with the company, which had a market cap of nearly $600 million as of Thursday’s close, and the Commodity Futures Trading Commission said it was reviewing the situation. As recently as last January, the European Central Bank ranked FXCM as the world’s third-largest retail foreign exchange broker.
The SNB stunned markets on Thursday, when it scrapped its three-year-old peg of 1.20 Swiss francs per euro . Shortly after the central bank’s announcement, the Swiss franc soared by around 30 percent in value against the euro, and by 25 percent against the dollar.
Currency trading platform Forex.com suspended trading in Swiss francs after the SNB’s announcement . On Friday, the company said it hoped to resume trading in the currency soon. A number of spread betters, including Forex.com, CMC Markets and ETX Capital, issued statements saying that Thursday’s extreme currency movements had not materially affected their companies’ financial positions. However Adam Myers, European head of FX research at Credit Agricole, said that some market participants appeared to have been aware that the SNB’s decision was coming before the official announcement. “It definitely looks like to us,” he said on Friday. “There was a movement in the market well ahead of the headlines (from the SNB).” He also said there was a “huge flow” of Swiss francs — around 34.2 billion — into Switzerland during December, according to the SNB, which is around 10 times the monthly average. “You wonder why the Swiss had to break the peg – they were brought to bear by the enormous strain of money flowing into the country during December.” – By CNBC’s Katrina Bishop. CNBC’s David Faber and Reuters contributed to this report.
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