The Swiss National Bank jolted the financial markets last week by suddenly abandoning its 3-year peg to the euro which was previously capped at 1.20 to the euro since 2011. The Euro lost more than a fourth of its value immediately after the cap was lifted and now trades at about par to the euro.
The recent wild spike in the Swiss franc exposes the dangers of borrowing in less liquid currencies and particularly those which exhibit central bank interventions. When the Swiss National Bank introduced a rate floor at 1.20, the CHF was no longer free-floating and attached a potential time-bonb to all CHF pairs. Notwithstanding this many forex traders kept dabbling in CHF pairs, mainly USD/CHF – using leverage which amplifies both profits and losses. Many traders were short of the franc at leverage of 20 times or more. With this degree of leverage, a 5% move against the trade would wipe you would but the trades were considered low risk by banks and brokers since the volatility of the frank was limited by the Swiss National Bank’s cap.
Here’s one email that a student sent in the aftermath; in trading there is nothing that is risk-free.
Dear XYZ,
As I see you are sharing information from various brokers regarding what happened last week. So, I wanted to ask you to enlighten my story.
I am a 27 years of Master student from Paris, who fell into Saxo Bank trap last week. I wanted to open an account and I was told that I had to deposit minimum 3,000 Euros in order to be able to trade and I did what I was asked. But what came later was the worst.
I opened a EURCHF buy order as every time it touched this level, the Swiss would do the Magic. But not this time.
When I came back from my lecture, the Swiss Bank announced the news and I had lost all my 3,000 euros even though I had a stop loss. Not only that, now my account is -22,054 Euros and someone from Saxobank called me on Friday that I must pay back the loss otherwise they can take lawsuit. So what should I do?
I am just a student, 22,000 euros for me is something not even imaginable.
I will also send you my account screenshots.
Jean Bouzy
Brokers nursing heavy losses
After last week’s dramatic decision by the Swiss Central Bank to remove the ceiling on the swiss franc against the euro the repercussions for many FX brokerages are ongoing. Some brokers claim that they only act as an intermediary taking positions made by clients as opposed to acting as a counterparty. But that leaves forex brokers with other hazards. The first of which is the creditworthiness of their clients. And second, any discrepancies between a client’s position and a parallel hedging transaction executed by the broker with a banking institution to lay off their risk.
There were reports yesterday that Cyprus based broker Iron FX has approached Alpari UK, and is in discussions to acquire some or all of the assets of the company which finally called in administrators on January 19th after other companies interested in the assets failed in their approach over the weekend to finalise a deal. The failed talks over the weekend meant that Alpari was unable to meet minimum regulatory capital requirements required by the FCA forcing it to issue a statement that “Upon the application of the directors of Alpari (UK) Ltd, on Monday 19 January 2015, the High Court appointed Richard Heis, Samantha Bewick and Mark Firmin of KPMG LLP as joint special administrators of Alpari (UK) Ltd, under the Special Administration Regime (SAR). Alpari (UK) Ltd is a company incorporated in the UK. Alpari (UK) Ltd applied for insolvency on Monday 19 January 2015 following the decision on Thursday 15 January 2015 by the Swiss National Bank to remove the informal peg to the euro at around 1.20 Swiss francs.”
Alpari UK said that ‘We have had a number of enquiries from interested parties in relation to the company’s business. We will be speaking with these parties and others over the next few days, and hope to secure a deal to preserve the business and jobs as far as possible’. Administrators KPMG said Alpari holds about £66 million in client money which would be returned.
This week IG Group also confirmed the impact of the Swiss franc move saying that 327 clients had been left with debts to the company totalling £17.3 million and also that it had suffered a £12 negative revenue meaning that the currency change had cost it around £30 million. The company said that the final impact from the Swiss franc’s move to its business would partially depend on its ability to recover debts from clients. IG UK has already started going after negative balances. Yesterday some clients reported receiving the following email:
‘Dear XYZ,
Our records show that you have an outstanding debit balance of £XZY due on your account.
Please clear this balance in full as soon as possible.
You can add the necessary funds by logging in to our dealing platform and making a payment through the ‘my account’ section, or by calling us on 020 7633 5304 with your debit or credit card details.
You can discuss this debit balance with our Credit team by calling us on 020 7633 5304.
Kind regards
Credit team
T 020 7633 5304
T +44 (0)20 7573 0010
E credit.uk@ig.com’
The highest profile casualty of the Swiss franc’s rise last week was US based FXCM, founded in 1999. Leucadia National Corp had to bail out the broker with $300 million after losses totalling $225 million due to high customer leverage levels and low levels of margin in customer accounts. Leucadia will earn interest of as much as 17 percent and can force a sale of the brokerage company, keeping at least half the proceeds beyond the loan amount.
The CFTC limits leverage to 50 to 1 in the U.S., most of FXCM’s retail customers were overseas, where regulators allow leverage of as much as 200-1. FXCM established a business model which meant that it acted as an agent for some customers with what it calls its ‘no-dealer desk.’ Under this model, FXCM doesn’t take the opposite side of customer trade, but hedges its exposure with a bank or other market maker. In last week’s trading, FXCM wasn’t able to close out its customers losing on Swiss franc trades in time to avoid covering their losses.
Many offshore brokerages don’t have to keep customer and firm money segregated in separate accounts adding to the risks for customers. Fortunately for Alpari customers this wasn’t the case as the FCA insists on this in the UK.
The events of last week have certainly highlighted to regulators the risks of FX trading with excessive leverage, limited protection for customer cash in foreign jurisdictions and not sufficient margin protection to insure the company when things go wrong. This must be a wake up call for action to protect investors from themselves.
Contrarian Investor UK
IMPORTANT: The posts I make are in no way meant as investment suggestions or recommendations to any visitors to the site. They are simply my views, personal reflections and analysis on the markets. Anyone who wishes to spread bet or buy stocks should rely on their own due diligence and common sense before placing any spread trade.
by contrarianuk
Fallout from Swiss currency decision continues
Jan 22, 2015 at 11:38 am in Market Commentary by contrarianuk
The Swiss National Bank jolted the financial markets last week by suddenly abandoning its 3-year peg to the euro which was previously capped at 1.20 to the euro since 2011. The Euro lost more than a fourth of its value immediately after the cap was lifted and now trades at about par to the euro.
The recent wild spike in the Swiss franc exposes the dangers of borrowing in less liquid currencies and particularly those which exhibit central bank interventions. When the Swiss National Bank introduced a rate floor at 1.20, the CHF was no longer free-floating and attached a potential time-bonb to all CHF pairs. Notwithstanding this many forex traders kept dabbling in CHF pairs, mainly USD/CHF – using leverage which amplifies both profits and losses. Many traders were short of the franc at leverage of 20 times or more. With this degree of leverage, a 5% move against the trade would wipe you would but the trades were considered low risk by banks and brokers since the volatility of the frank was limited by the Swiss National Bank’s cap.
Here’s one email that a student sent in the aftermath; in trading there is nothing that is risk-free.
Dear XYZ,
As I see you are sharing information from various brokers regarding what happened last week. So, I wanted to ask you to enlighten my story.
I am a 27 years of Master student from Paris, who fell into Saxo Bank trap last week. I wanted to open an account and I was told that I had to deposit minimum 3,000 Euros in order to be able to trade and I did what I was asked. But what came later was the worst.
I opened a EURCHF buy order as every time it touched this level, the Swiss would do the Magic. But not this time.
When I came back from my lecture, the Swiss Bank announced the news and I had lost all my 3,000 euros even though I had a stop loss. Not only that, now my account is -22,054 Euros and someone from Saxobank called me on Friday that I must pay back the loss otherwise they can take lawsuit. So what should I do?
I am just a student, 22,000 euros for me is something not even imaginable.
I will also send you my account screenshots.
Jean Bouzy
Brokers nursing heavy losses
After last week’s dramatic decision by the Swiss Central Bank to remove the ceiling on the swiss franc against the euro the repercussions for many FX brokerages are ongoing. Some brokers claim that they only act as an intermediary taking positions made by clients as opposed to acting as a counterparty. But that leaves forex brokers with other hazards. The first of which is the creditworthiness of their clients. And second, any discrepancies between a client’s position and a parallel hedging transaction executed by the broker with a banking institution to lay off their risk.
There were reports yesterday that Cyprus based broker Iron FX has approached Alpari UK, and is in discussions to acquire some or all of the assets of the company which finally called in administrators on January 19th after other companies interested in the assets failed in their approach over the weekend to finalise a deal. The failed talks over the weekend meant that Alpari was unable to meet minimum regulatory capital requirements required by the FCA forcing it to issue a statement that “Upon the application of the directors of Alpari (UK) Ltd, on Monday 19 January 2015, the High Court appointed Richard Heis, Samantha Bewick and Mark Firmin of KPMG LLP as joint special administrators of Alpari (UK) Ltd, under the Special Administration Regime (SAR). Alpari (UK) Ltd is a company incorporated in the UK. Alpari (UK) Ltd applied for insolvency on Monday 19 January 2015 following the decision on Thursday 15 January 2015 by the Swiss National Bank to remove the informal peg to the euro at around 1.20 Swiss francs.”
Alpari UK said that ‘We have had a number of enquiries from interested parties in relation to the company’s business. We will be speaking with these parties and others over the next few days, and hope to secure a deal to preserve the business and jobs as far as possible’. Administrators KPMG said Alpari holds about £66 million in client money which would be returned.
This week IG Group also confirmed the impact of the Swiss franc move saying that 327 clients had been left with debts to the company totalling £17.3 million and also that it had suffered a £12 negative revenue meaning that the currency change had cost it around £30 million. The company said that the final impact from the Swiss franc’s move to its business would partially depend on its ability to recover debts from clients. IG UK has already started going after negative balances. Yesterday some clients reported receiving the following email:
‘Dear XYZ,
Our records show that you have an outstanding debit balance of £XZY due on your account.
Please clear this balance in full as soon as possible.
You can add the necessary funds by logging in to our dealing platform and making a payment through the ‘my account’ section, or by calling us on 020 7633 5304 with your debit or credit card details.
You can discuss this debit balance with our Credit team by calling us on 020 7633 5304.
Kind regards
Credit team
T 020 7633 5304
T +44 (0)20 7573 0010
E credit.uk@ig.com’
The highest profile casualty of the Swiss franc’s rise last week was US based FXCM, founded in 1999. Leucadia National Corp had to bail out the broker with $300 million after losses totalling $225 million due to high customer leverage levels and low levels of margin in customer accounts. Leucadia will earn interest of as much as 17 percent and can force a sale of the brokerage company, keeping at least half the proceeds beyond the loan amount.
The CFTC limits leverage to 50 to 1 in the U.S., most of FXCM’s retail customers were overseas, where regulators allow leverage of as much as 200-1. FXCM established a business model which meant that it acted as an agent for some customers with what it calls its ‘no-dealer desk.’ Under this model, FXCM doesn’t take the opposite side of customer trade, but hedges its exposure with a bank or other market maker. In last week’s trading, FXCM wasn’t able to close out its customers losing on Swiss franc trades in time to avoid covering their losses.
Many offshore brokerages don’t have to keep customer and firm money segregated in separate accounts adding to the risks for customers. Fortunately for Alpari customers this wasn’t the case as the FCA insists on this in the UK.
The events of last week have certainly highlighted to regulators the risks of FX trading with excessive leverage, limited protection for customer cash in foreign jurisdictions and not sufficient margin protection to insure the company when things go wrong. This must be a wake up call for action to protect investors from themselves.
Contrarian Investor UK
IMPORTANT: The posts I make are in no way meant as investment suggestions or recommendations to any visitors to the site. They are simply my views, personal reflections and analysis on the markets. Anyone who wishes to spread bet or buy stocks should rely on their own due diligence and common sense before placing any spread trade.