FX Brokers declare insolvency after Swiss Franc Shock

January 18, 2015 11:32 AM  – NewsWire

The recent Swiss Franc’s uncoupling from Euro caused major ripples in currency trade, plunging many brokerages into sudden debt, a giant hedge fund collapsed.


LONDON – In an abrupt move that caught the world off-guard, Swiss National Bank has cancelled its 3-year policy of capping the franc value at 1.20 per 1 euro. This move resulted in a surge of over 40% percent in franc value against the euro, causing difficulties to brokers whose clients betted EUR against the CHF.

One immediate result was that many firms issued warning statements concerning the effect of this shock over their finances. The outcome of the SNB move was that the majority of clients in many firms sustained losses that exceeded their account equities. When this happens, these losses become the brokers’ liability. This has forced many firms to declare insolvency.

Among them was retail sector & IT InvesttechFX Technologies Inc an online FX broker firm which suffered $10m losses and was forced to confirm it has entered into insolvency. Another player in retail, IG Group (OTC:IGGHY), an interdealer brokerage from London, stated that many of its clients were able to close out their CHF positions before the firm could close out its own (hedged positions), thus forecasting a 30 million pound ($45m) loss.

Other brokers also filed for insolvency. New Zealand firm Global Brokerage announced its closing, due to an inability to comply with regulator’s demand of 1m NZD equity (782K USD).

In an official announcement from Friday, British firm Alpari (UK) was quoted by Reuters stated that (the franc’s uncoupling from euro) “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. This has forced Alpari (UK) Limited to confirm that it has entered into insolvency.”

Other firms managed to weather the storm. New York-based FXCM (NYSE:FXCM), the largest U.S. retail foreign-exchange broker, saw an especially rocky weekend. Starting with its shares dropping over 90% during the morning before being halted, it managed to rebound and arrive at 4.44$ at the end of Friday. Inbetween, FXCM managed to receive a 300 million dollar cash infusion on  a two year loan from owner of  NY investement bank Jefferies Group, Leucadia. It should be noted that FXCM’s closing price on Thursday was $12.63.

These happenings bear on the debate concerning how liberal should regulators be, as for example, the U.S. Commodity Futures Trading Commission allows investors to put down a meager 2% (of total value of Forex bets). Hence, when sudden global moves such as SNB’s hit, brokerages are left to deal with almost insurmountable losses.