Casualties mounted from the Swiss currency shock as the largest U.S. retail foreign-exchange brokerage said client losses threatened its compliance with capital rules and a New Zealand-based dealer went out of business.
FXCM Inc., which handled a record $1.4 trillion of trades by individuals last quarter, said clients owe $225 million on their accounts after the Swiss National Bank’s decision to abandon the franc’s cap against the euro roiled global markets. Global Brokers NZ Ltd. said the impact on its business is forcing it to shut down.
“I would be astonished if we did not see more casualties,” Nick Parsons, the London-based head of research for the U.K. and Europe at National Australia Bank Ltd., said by phone from Sydney. “This was a 180-degree about turn by the SNB. People feel hurt and betrayed.”
Dealers in London at banks including Deutsche Bank AG, UBS Group AG and Goldman Sachs Group Inc. battled to process orders yesterday when the SNB shocked markets with its announcement on Thursday morning in Zurich. The franc surged as much as 41 percent versus the euro, the biggest gain on record, and climbed more than 15 percent against all of the more than 150 currencies tracked by Bloomberg.
“Due to unprecedented volatility in EUR/CHF pair after the Swiss National Bank announcement this morning, clients experienced significant losses,” FXCM said in a statement dated Jan. 15. That “generated negative equity balances owed to FXCM of approximately $225 million.”
FXCM’s shares dropped 15 percent yesterday to $12.63, the lowest in almost two years. That reduced its market capitalization to $595.6 million. Spokeswoman Jaclyn Klein didn’t immediately respond to phone calls to her mobile and office phones.
The company warned investors in its 10-K SEC filing last March that its risk controls were imperfect. FXCM had 230,579 retail customers on Dec. 31. They traded $439 billion of currency in December, with an average of 595,126 retail client trades a day.
“Some of our methods for managing risk are discretionary by nature and are based on internally developed controls and observed historical market behavior,” the company said. “These methods may not adequately prevent losses, particularly as they relate to extreme market movements.”
The SNB ended its three-year policy of capping the franc at 1.20 per euro a week before the European Central Bank meets to discuss government bond purchases to boost the euro-area economy. Such a policy, known as quantitative easing, could spur pressure on the franc to appreciate against the euro. The SNB spent billions defending the currency cap after introducing it in September 2011.
Deutsche Bank was among dealers to suffer disruptions to electronic trading, with its Autobahn platform temporarily ceasing to provide quotes, according to a dealer from outside the bank. Auckland-based company Global Brokers NZ said the market for francs was disrupted for hours.
“The majority of clients in a franc position were on the losing side and sustained losses amounting to far greater than their account equity,” Global Brokers NZ director David Johnson said in a statement dated Jan. 15 and posted on the website of affiliated company Excel Markets.
HSBC Holdings Plc is investigating reports that customers in Hong Kong bought the Swiss franc below market rates when an online banking system failed to keep up with the currency’s gains after the removal of the cap.
Apple Daily and the Hong Kong Economic Journal cited unidentified bank customers as saying that they took advantage of the mistake yesterday evening. HSBC spokeswoman Maggie Cheung said in an e-mail that the lender was looking into the reports.
Global Brokers NZ said it was experiencing “hundreds of withdrawal requests.”
“The interbank market for francs was illiquid for hours after the event and no traders with an open franc position were able to close it for a significant period of time, at any broker,” Johnson said. All of GBL’s client funds are in segregated accounts and “100 percent of positive client equity or balance is safe and withdrawable immediately.”