The surprise surge in the Swiss franc left currency brokers and banks worldwide licking their wounds on Friday, with at least two brokers declaring insolvency and others warning of heavy losses.
Switzerland’s central bank shocked foreign exchange and other financial markets on Thursday when it scrapped its three-year bid to stop the franc from strengthening.
Within minutes the franc surged by 30 percent, later settling to a 15 percent gain against the euro. The shockwaves were felt in currency markets across the globe and some brokers could not withstand the jolt.
In London, currency broker Alpari UK Ltd — sponsor of English Premier League soccer team West Ham United — declared insolvency after clients’ losses linked to the sharp rise in the franc were passed on to the company.
That followed an announcement by Global Brokers NZ Ltd in New Zealand declaring “a total loss of operating capital,” while leading forex broker FXCM Inc in New York was forced to seek a US$300 million rescue from Leucadia National Corp after clients left it with losses of up to US$225 million.
Major players were humbled by the brutally quick turn of fortune.
“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 shock 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,” the statement said.
“This has forced Alpari (UK) Limited to confirm today ... that it has entered into insolvency,” it said.
In Auckland, Global Brokers NZ announced it was closing after it sustained losses that meant it could no longer meet New Zealand regulators’ minimum capital requirements.
In that sense, FXCM was lucky to find a savior. Leucadia, parent of investment bank Jefferies Group LLC, injected the funds via a two-year loan that will cost FXCM a hefty 10 percent annual coupon.
“We could not be more grateful to Leucadia and its team for their rapid and effective response and to our regulators, who have been willing to work with us through this challenging process,” FXCM CEO Drew Niv said.
“Leucadia’s support and this financing are by far the best alternative for FXCM, our customers, our shareholders and all other relevant constituencies,” he said.
In London, IG Group PLC said that its losses arising from the matter would total up to ￡30 million (US$45.4 million), but stressed that it was in an “extremely robust financial position.”
Rival City Index Group meanwhile reassured clients that it had not suffered “any material impact.”
In New York, shares of Interactive Brokers LLC lost 6.65 percent in early trade on Friday, after having warned that some clients had reported losses totaling around US$120 million.
The Swiss central bank had been defending a floor of SF1.20 to the euro for three years in an effort to protect Switzerland’s vital export and tourism industries.
Many investors had been buying Swiss francs as a safe haven currency, pushing its value up and hurting the country’s international competitiveness.
However, with the European Central Bank expected to flood the market with euros next week, the Swiss central bank would have faced more pressure to defend the floor.
After dropping as low as SF0.8517 against the euro, it has stabilized around the level of parity.
The Swiss surprise also wrong-footed a number of big banks.
British bank Barclays PLC lost “tens of millions” of US dollars, according to a source who requested anonymity, and Deutsche Bank AG lost on the order of US$150 million, according to a report by the Wall Street Journal.
Citigroup Inc, the world’s biggest currencies dealer, lost more than US$150 million after the Swiss central bank’s surprise decision to let the franc trade freely against the euro, Bloomberg News reported, citing a person briefed on the matter.
The losses occurred on the New York-based bank’s trading desks and are not tied to its relationships with FXCM and other retail trading platforms, Bloomberg said.
Spokesmen for Citigroup, Frankfurt-based Deutsche Bank and London-based Barclays declined to comment.
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