Swiss Franc Fallout Claims Mass Casualties

Forex traders like ETX Capital have this week been witness to one of the most damaging currency swings in the modern trading era.

The abandonment of the francs currency ceiling against the euro saw its value soar by around 30 per cent, leaving investment banks and foreign exchange brokers around the world struggling to deal with the fallout.

A Global Catastrophe

It was a gloomy start to the week for financial market investors from around the world, with a leading European broker filing for administration on Monday, and a Danish bank forced to survey their stunning losses after the franc’s sudden, violent swing.

The Financial Conduct Authority (FCA) has reported sending out mass letters to a large number of currency brokers, urging them to update the regulator as to the extent of the damage to their balance sheets.

This widespread chaos was catalysed by last Thursday’s market movements, which saw the Swiss franc abandon its currency ceiling against the euro. The event has already been described as arguably the most damaging currency swing in the modern trading era.

The worst affected victims are investment banks and foreign exchange brokers, with one of the most note-worthy casualties being leading broker Alpari. Although a last minute rescue was put into effect, it proved too little to save the forex giant. Denmark’s Saxo bank is also reported to have suffered significant losses.

The Factors Driving the Swiss Franc Crisis

Many commentators have been dazzled by the sheer extent of the chaos, but should it truly have come as such a surprise? The answer is no.

The industry has always proved lightly regulated, with customers offered worryingly large amounts of leverage as an enticement to trade. Those who chose to deposit money with brokers were able to use this as collateral for borrowing much larger sums in an attempt to magnify their trading positions.

Much of the fallout has been centred in London, the global hub of currency trading. In the city, it has not been uncommon for investors to find themselves being offered 100-200 times the amount they’ve deposited in their account to use in their trades. Another common practice was to cover client losses beyond their deposit in the short term, in order to allow customers to gear up their accounts.

What has happened in this instance is that these violent market movements have prompted investors to call in larger payment margins from their customers, many of who have found themselves unable to foot the bill.

The Casualties

The list of causalities in the wake of the storm has proved indiscriminate, with big names including IG Group, CMC Markets, Swissquote, Oanda, and Interactive Brokers all reporting significant losses.

In the US, FXCM were forced to accept $300 million from Leucadia National to allay fears that they would breach their capital requirements.

In New Zealand, Global Brokers closed its doors.

Denmark’s Saxo Bank has also experienced significant losses, although its survival seems guaranteed. The bank has stated that it has suffered losses due to customers unable to pay their debts, but will still be able to fulfil its regulatory capital requirements.

The future of UK-based Alpari looks less certain. KPMG has been appointed as a special administrator in the wake of a failed take-over deal. The company employs 170 people, and has almost $100 million in client money that has already been segregated under FCA rules.

KPMG’s Richard Heis states: “We have had a number of enquiries from interested parties in relation to the company’s business. We will be speaking with these parties and others over the next few days, and hope to secure a deal to preserve the business and jobs as far as possible.”

The FCA’s Response

The FCA has been proactive in its reaction to the crisis. It had already embarked upon a root-and-branch review of the retail forex sector, and the crisis looks set to play a major role in its continued investigations.

It is reported that the concerns raised within the FCA report are similar to those of France’s Autorité des Marchés Financiers, who last year reported that 85 per cent of customers lost money through retail-forex trading. Following the devastation left in the wake of the current currency crisis, the FCA report looks set to posit similarly damning findings.