By Anjani Trivedi, Tommy Stubbington and David Enrich
Fallout from Switzerland's wildly swinging currency ricocheted
around the world, hitting global banks with tens of millions of
dollars in losses and triggering the collapse of some brokerage
firms.
Deutsche Bank AG suffered about $150 million in losses Thursday
after the Swiss National Bank abruptly removed the cap on the Swiss
franc's value, sparking a massive rally, according to a person
familiar with the matter. Barclays PLC also racked up tens of
millions of dollars in losses, although they totaled less than $100
million, another person said.
Meanwhile, a major U.S. currency broker warned its equity was
wiped out, a U.K. retail broker entered insolvency and a New
Zealand foreign-exchange trading house collapsed. Regulators in
Europe and Asia scrambled to assess the damage, seeking information
from banks and brokerages and trying to ascertain the potential
impact on mom-and-pop investors.
The losses were triggered by the Swiss franc's 30% jump against
the euro in the minutes after the SNB scrapped its cap on the
nation's currency relative to the euro. Brokers found themselves
unable to trade because of the unexpected volatility and the fact
that some big banks stopped quoting rates for francs. Their
customers' huge losses, partly fueled by large quantities of
leverage, which allows clients to stake large sums with relatively
little cash, quickly eroded the brokerages' financial cushions,
tipping some into insolvency.
For Deutsche Bank and Barclays, the losses stemmed at least in
part from their traders' portfolios of options tied to the Swiss
franc, according to traders and other banking officials. The value
of those options is directly tied to the level of market volatility
and the Swiss franc exchange rate. The sudden change in those two
factors caused immediate losses for the banks, these people said.
While representing large single-day losses, they are unlikely to
have a major long-term impact on either bank.
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. "As a result of
these debit balances, the company may be in breach of some
regulatory capital requirements," the company said.
FXCM's shares didn't open for trading on the New York Stock
Exchange pending news. The stock had traded down more than 80% in
the premarket. A spokesman for the U.S. Commodity Futures Trading
Commission, which regulates FXCM, said it is reviewing the
company's situation.
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). "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," the company said, blaming the SNB's move.
Regulators in Hong Kong and New Zealand said they were in touch
with banks and brokerages about the situation.
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 buy or 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
Trading in foreign exchange markets averages $5.3 trillion a
day, according to the Bank for Intentional Settlement's most recent
central bank survey from April 2013. Swiss franc transactions
account for average daily volumes of $275 billion.
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. The downside: a small adverse 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, wrote 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.
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."
Retail 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.
Lucy Craymer,
Katie Martin
,
Ewen Chew
, James Glynn, Chiara Albanese and Christopher Whittall
contributed to this article.
Write to Anjani Trivedi at anjani.trivedi@wsj.com, Tommy
Stubbington at tommy.stubbington@wsj.com and David Enrich at
david.enrich@wsj.com
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