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 Some major banks also lost out when the Swiss National Bank scrapped
its three-year-old cap on the franc against the euro <EURCHF=EBS>
without warning on Thursday, including Britain's Barclays <BARC.L>
which lost "tens of millions" of dollars, an industry source said.
Retail broker Alpari UK filed for insolvency on Friday, while New
York-listed FXCM Inc <FXCM.N>, one of the biggest platforms catering
to online and retail currency traders, said it looked to be in
breach of regulatory capital requirements after its clients suffered
$225 million of losses.
FXCM had to turn to Leucadia National Corp <LUK.N>, the parent of
investment bank Jefferies, to quickly broker a $300 million loan
that was expected to close Friday afternoon.
In the past 15 years, retail currency trading has grown quickly,
attracting individuals staking their own money with long trading
hours, low transaction costs and the ability to take on huge risks
for a relatively small sum.
Retail currency trade makes up nearly 4 percent of global daily spot
turnover of nearly $2 trillion, the latest survey from the Bank of
International Settlements shows, having grown from almost nothing in
the 1990s.
This small share means the sector poses limited risk to the
financial system but retail brokers are much more vulnerable to big
losses than banks. Regulators in New Zealand, Hong Kong, Britain and
the United States said they were checking on brokers and banks after
reports of volatility and losses.
The move "caused by the SNB's unexpected policy reversal of capping
the Swiss franc against the euro has resulted in exceptional
volatility and extreme lack of liquidity," Alpari, the shirt sponsor
of English Premier League soccer club West Ham, said in a statement.
"This has resulted in the majority of clients sustaining losses
which exceeded their account equity. 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."
Online trading services provider London Capital Group Holding
<LCG.L> put its franc-related losses at up to 1.7 million pounds
($2.6 million).
The franc surged as much as 40 percent to a high of 0.8500 per euro
<EURCHF=EBS> after the Swiss central bank lifted its 1.20 per euro
cap.
New Zealand foreign exchange dealer Global Brokers NZ Ltd closed due
to hefty losses. The national Financial Market Authority said it
would "be seeking assurances that the client funds have been
protected and segregated".
The Hong Kong Monetary Authority said it was "following up with the
banks on their practice in this regard ... to understand the
implication, if any, but we would not comment on the situation of
individual banks."
Britain's Financial Conduct Authority said it was talking to Alpari,
while the U.S. National Futures Association said it was monitoring
the foreign exchange brokers it oversees.
BROKER WOES, REGULATORY POWERS
FXCM Inc <FXCM.N> shares fell nearly 90 percent in pre-market hours
before being halted for the regular trading session on the New York
Stock Exchange. In after-hours action, it resumed trading <FXCM.K>,
rebounding from the premarket losses, but still down 70 percent from
Thursday's close.
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Top executives from FXCM went through company books until at least 5
a.m. EST (1000 GMT) on Friday, according to a source close to FXCM.
Regulators were in FXCM's offices in downtown Manhattan on Friday,
according to two sources.
A spokesperson for the U.S. National Futures Association said it was
in "constant" contact with FXCM, and had been "watching the
volatility" as a result of the Swiss central bank move. NFA rules
allow a leverage ratio of 50 to 1 on transactions in the Swiss
franc, which means even a 2 percent move can wipe out a position.
Not all brokerages suffered. GAIN Capital Holding Inc <GCAP.N> said
on Friday it generated a profit on Thursday from trading, and that
its strong financial position will allow it to win market share. Its
shares closed up 2.9 percent at $8.52.
Canada-based foreign exchange broker OANDA said in a statement it
"will pardon our clients' negative account balances associated with
this market event" and would not "re-quote or amend" clients' trades
on the Swiss currency.
But Denmark's Saxo Bank, one of the biggest players in retail
foreign exchange trading, said late on Thursday it would potentially
set different rates for its clients' transactions.
Saxo Bank chief financial officer Steen Blaafalk told Reuters some
clients had suffered losses but the bank was well capitalised.
Retail investors, some of whom face huge losses, protested when Saxo
said it might set different rates.
Lawyers said this could be contested.
"I think there will be litigation and disputes over automatic
close-outs," said a financial services lawyer.
Hong Kong media reported clients of HSBC Holdings <HSBA.L> were able
to buy the Swiss currency at below-market rates for several hours
through its online system, making several thousand dollars in
profits on the trades.
HSBC said online foreign exchange trading for the Swiss franc "is
currently operating normally and we will investigate reports that
customers could trade at old rates initially after the cap was
lifted."
(Additional reporting by Michelle Chen, Andrew Winterbottom, Huw
Jones, Alasdair Pal, Lincoln Feast Elzio Barreto and Jessica
Toonkel; Editing by Ruth Pitchford, David Gaffen and James
Dalgleish)
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