Brokers around the world are crumbling in the wake of the Swiss
National Bank's shock decision to remove the cap on its
currency.
A major U.S. currency broker warned its equity was wiped out, a
U.K. retail broker entered insolvency and a global foreign-exchange
trading house failed when they suffered big losses sparked by the
Swiss central bank's move, which stunned markets Thursday and is
now forcing brokers from New Zealand and London to close their
doors and face large losses.
On Friday, regulators in Japan, Hong Kong, Singapore and New
Zealand sought information from brokers about what happened. In
Japan, the Finance Ministry was checking on trading firms after
industry sources said the country's army of mom and pop
foreign-exchange traders suffered big losses.
The losses were caused when big wholesale banks stopped quoting
franc rates, liquidity dried up and volatility spiked in the
foreign-exchange market Thursday, making it impossible for brokers
to execute trades as losses spiraled. Many of these brokers offer
100 to 1 leverage, allowing clients to stake large sums with
relatively little cash, meaning a 1% loss can wipe out a
client.
The Swiss franc jumped 30% against the euro in minutes after the
Swiss National Bank stopped capping the nation's currency against
the euro. The surprise move sent the Swiss franc soaring and caused
big losses for traders who had bet against the currency.
FXCM Inc., the biggest retail foreign-exchange broker in the
U.S. and Asia, said in a statement that the unprecedented
volatility in the euro against the Swiss franc triggered losses
that left it with a negative equity balance of about $225 million
and that it was trying to shore up its capital.
FXCM was operating normally in Hong Kong on Friday with
employees trying to sort out trading positions and answer questions
from clients about their trading losses.
"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 capitalization of about $701.3 million,
said. Shares of the company fell 15% in U.S. trading and tumbled
another 12% after hours.
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).
In a statement, Global Brokers said the SNB's decision resulted
in rare volatility. "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," it said.
Andrew Park, a spokesman for New Zealand's Financial Market's
Authority, said the financial markets regulator was seeking a
status update from Global Brokers and would be seeking assurances
that client funds have been protected and segregated as the company
noted in a statement.
Hong Kong's de facto central bank said it was following up with
banks on their online banking services practices. Regulators in
Singapore, too, were in contact with banks and foreign-exchange
brokers after the SNB's moves, a person familiar with the matter
said.
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 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
HSBC PLC, one of the biggest wholesale dealing banks in the
market, said in a statement Friday that it suspended its trading in
the franc for a time Thursday. Trading has now resumed.
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. But the downside is a small 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, has written 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. A
lot of banks and brokers are in the same position. 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."
Many people used the normally stable Swiss franc for carry
trades, where investors borrow in a currency from a country with
low interest rates and then exchange it for a currency in a country
where rates are higher and collect the difference. In this type of
trade, which is usually highly leveraged, investors would have
effectively been betting against the Swiss franc.
"Theoretically, on a cash position on a currency, your losses
are unlimited," said BNP Paribas' Mr. Baig.
Australian 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.
Investors on Friday fled to safety by buying Japanese government
bonds and selling stocks, commodities and other currencies. The
Nikkei fell 1.4% and the euro fell to a three-month low of
Yen134.70, though it rebounded later.
Ewen Chew and James Glynn contributed to this article.
Write to Anjani Trivedi at anjani.trivedi@wsj.com and Lucy
Craymer at Lucy.Craymer@wsj.com
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