Updates: Retail FX Brokers In Deep Trouble, Some Cease Operations, Others In Bailout Talks
As we have warned, not only traders and investors, but also brokers and dealers that will see large losses on their capital as a result of this black swan.
So far, up to 41 retail FX brokers have either made public announcements or issued statements to their clients with varying impacts of their operations - from "minimal financial impact" to "insolvency/shut down".
For now, these brokerage firms are hardest hit:
- Alpari (shutdown);
- Global Brokers (shutdown);
- FXCM ('bailed out');
- IG (up to £30mn losses);
- Interactive Brokers (around $120mn in losses);
- Swissquote (CHF25mn provision activated)
We will write another post in due time to keep track of the slew of broker announcements. One referred the SNB's move on Thursday to be "Black Thursday". We agree.
Many retail FX brokers in trouble after adverse CHF move puts majority of clients exposed to short-CHF positions underwater. Main issue lies with under-capitalization as there were many cases in which clients' equity went negative, extra losses (above clients' segregated capital) were borne by broker.
Brokers we wish to highlight are: FXCM (US), Oanda (Canada), Global Brokers (NZ), Alpari (UK)
- FXCM LLC (NYSE: FXCM) - To be 'bailed out' by investment bank Jerreries, will receive $300mn in capital injection
- US-based; largest retail FX broker in the world; founded in 1999
- Initially reported clients owed them around $225mn due to negative equity
- Said it may be in breech of minimum regulatory capital requirements
- Said it was in discussions to replenish capital to prior levels
- By Friday morning, FXCM was trading pre-market at around $1.40, from $17 just days before (-92%), stock was halted from trading on Friday; no news of when it will resume trading
- Reuters reported that by afternoon, FXCM was in private talks with Jerreries New York for a rescue package via a capital injection
- Capital injection in the form of senior secured-term loan of $300mn with tenure of 2 years and 10% initial coupon
- Jerreries Group LLC is owned by Leucadia National Corp.
- Leucadia's stocks were halted at 1224, just as Jerreries released statement on the $300mn loan
- With the loan, FXCM can resume normal operations and meet regulatory capital requirement.
We asked on social media, when the deal was going through, "is this another Knight Capital redux?" seems like it is; the same distressed-corporation strategy, the same "savior" - Jerreries was involved in Knight's bailout then.
As an anecdote, the funding package isn't an equity deal but a debt deal. In the previous Knight Capital (the known as Knight Trading) saga, the firm booked a loss of $440mn due to a trading glitch that almost bankrupted it if not for the eleventh hour rescue deal led by none other than Jefferies.
- Alpari Ltd - Enters into insolvency after "majority of clients" sustained losses; ceases business
- Officially entered into insolvency on 16 January 2015, Friday
- Existing monies of clients will remain segregated and will be returned duely
- Majority of clients that had leveraged short-CHF positions were not able to liquidate those positions in time due to the ferocity of the move
- Clients incurred huge negative balances on their accounts as a result; losses were passed on to Alpari, firm then takes a hit on its capital
- Although Alpari has not revealed the full details about its own trade books, we assume that it too had suffered large losses from the volatility in the CHF on its own trades
- Global Brokers NZ Ltd - Shuts downs after operating capital wiped out
- Full loss of operating capital; unable to meet minimum regulatory capitalization of N$1mn
- Excel Markets served as Global Broker's retail FX brokerage arm
- Unable to resume business; shuts down
- All open clients' trade closed by 1700 Thursday; remaining equity was segregated and withdraw-able immediately
- Losses mounted due to extreme illiquidity on broker's dealing side and was passed on to clients; entire CHF market was frozen for substantial period due to lack of offers
- Negative balances on clients' accounts were not reimbursable; clients to bear their negative balances (i.e. they have lost more than their initial capital and must pay the deficit)
- Oanda (International) - Honored all trades and executions, restored clients' negative balances
- Business as usual for the Canadian-based broker, after it released statement to all of its clients post SNB
- Did nor re-quote or alter clients' CHF trades although spreads widened a lot; that was inevitable across the board
- Offered to restore clients' negative balances to zero, for those that went negative due to the CHF's move
- No adverse financial impact although it reported that losses of undisclosed amounts were sustained; this is supported by the initiate to restore clients' negative balances - proving it was extremely well capitalized
- Firm was approached by several competitors (that had sustained serious losses) for acquisitions but declined to purchase
We have to commend Oanda for their immensely courageous and emphatic spirit, because to our knowledge, they are the only retail FX broker that has gone out of its way to save clients that would have otherwise been underwater (loosing more capital than they initially committed). Oanda was not obligated to prevent negative balances, as such is the inherent risks related to margin-trading and spread betting. Oanda stood up to the occasion, and offered to help clients with negative equities because they felt a moral responsibility and not because they were require to by law. In doing so, oanda would have taken a further hit to its own capital and profits; such an act would have eaten into its margins. But it did so anyways. For that, we take our hats off to Oanda and wish it the best of luck in its business. For the record, we are ourselves clients of Oanda and are proud to be serviced by such a company.
A Move So Fierce, It Has Never Been Witnessed Before
Note: We wrote about Jim Reid's concept of "volatile volatility", on how more and more asset classes are slipping into 'chaos'
We are shocked, shell shocked in utter dismay; while we were still updating our memorial piece on the Charlie Hebdo attacks news so big and unprecedented broke, that we had no choice but to shelve all immediate plans and cover this extremely nerve wrecking story. In our more than 6 years in the financial markets, we have NEVER seen anything as ginormous as the move in the Swiss Franc has been. Something as innocuous as decoupling one's currency after 3 years of the status quo has turned out to be what will go down the history books.
To be certain, we are reading about countless anecdotes of professional traders (read hedge funds, management money, trading desks, what have you) suffering huge margin calls on their positions; be it tactically positioned or macro-based (a la those sexy hedge funds).
The bottom line is crystal clear, almost nobody had guessed the SNB's hand in today's shocking move; and we suspect the SNB better gear up with some physical protection as we smell Molotov cocktails and napalm bombs when trading closes later and the full scene of the vicious carnage is laid fully bare for all to see.
We don't have time to go into the minutiae and the finer shenanigans for now. We believe these aspects to be very important for analyzing and we will certainly touch on this field after the dust settles and some 'calm' permeates through this fog or war. As a succinct primer, aspects such as positioning in the futures market; sentiment indicators; central bank foreign reserves; cross boarder flows and balances; treasury capital; contagion effects via the organic currency markets; the ECB-SNB monetary mechanics now that the currency floor has been removed; so and and so forth.
Aftermath: Nothing Short Of Armageddon
We'll just let the charts do the talking here. In short, the CHF has been superbly strong against all currencies (strongest against the Euro, and Sterling). Strength has been sticky throughout the European session and position liquidation and stop tripping has fueled the rally as New York lights up. There is A LOT of pain in the trading and investing community. Even without looking at CFTC positioning, we know from experience that a majority of managed money has been short the CHF especially after the Swiss Gold referendum did not see a passage.
In other asset classes, Treasury yields, understandably plunged across the entire world, and the entire Swiss bond curve lest of the 10 Year is now negative, with the "On The Run" itself threatening to go negative soon as can be seen on the rate table.
Other than the currency markets, Swiss stocks are down massively, one of (or maybe even THE LARGEST) down day in their recorded history. As a stronger CHF means less monetary largess despite the SNB diving deeper into the monetary twilight zone of NIRP (see below for commentary on this).
As American markets are just waking up to the bright red margin calls, the carnage in Switzerland remains. The Swiss Market Index is down almost 15% although it is bouncing back moderately. Swiss stocks are now at 3-month lows. More intriguingly, the yield curve of the SGB (Swiss Government bond) complex has been crushed 10-20bps lower with yields negative all the way out to 9 year maturity!
The absence of an inversion (short end with higher negative rates than the belly and tail) seems to signify that negative rates are mostly due to the SNB lowering its benchmark interest rate and not because of risk aversion. Of course whether or not global markets take this as a CUE to dump risk assets is another wild card. With global equity markets staging ephemeral bidirectional swings, nothing is truly certain other than the bllodshed seen today.
The smart people of Goldman have quickly come out with their analysis of the development, saying that the Euro should be expected to weaken further against the dollar as the ECB lines up for its announcement next week. They think the SNB's sudden withdrawal from its outright currency management framework is due to the anticipation that the ECB will launch sovereign QE, thereby dragging the Franc to uncomfortably low levels if it transpires. All this remains wild speculation until the moment of truth as we turn into next week.
But for now, here is Goldman:
To bridge the time gap between our postmortem analysis and the currency of this development, readers should be able to take away a thing or two from this brief analysis by the Swiss investment bank, UBS. Although the analysis reiterates what we already know, it also provides more breadth on the impact of the SNB's decision to push its plunger. The main takeaway for us lies in the last section on the bank's credibility going forward. Will the SNB loose its mojo in its commandeering role? Too early to tell, but the possibility is indeed present.
Here is UBS's Beat Siegenthaler:
Here are some comments from the professionals moments after the epic happened:
"As if millions of macro hedge funds suddenly cried out in terror and were suddenly silenced", as macro strategy hedge funds will be big loosers if their delta risks weren't hedged
Swatch Group's CEO Nick Hayek called the SNB's decision a "tsunami" for the Alpine country and its economy
"Words fail me! Jordan is not only the name of the SNB president, but also of a river… and today's SNB action is a tsunami; for the export industry and for tourism, and finally for the entire country" - Nick Hayek
- "Absolutely shocking... For companies with international operations – translated earnings are going to be lower and if companies make products in Switzerland it is going to hurt margin. It is a terrible day for corporate Switzerland" - Jon Cox (Analyst at Kepler Cheuvreux)
Alexandre Baradex (Chief Market Analyst, IG France) - "This is extremely violent and totally unexpected, the central bank didn't prepare the market for it. It's sparking panic across all asset classes. It suddenly revives the risk of central bank policy mistakes, right when central bank action is what's keeping equity markets going"
Lex Van Dam (Hedge Fund Manager, Hampstead Capital) - "Major losses in euro-franc trades are causing panic selling and deleveraging across the board"
- Chris BeauChamp (Market Analyst, IG) - "My initial reaction was that it is a sign the ECB is about to do something, which makes it odd that the reaction has been so negative across European stocks. However, it's not every day that a central bank pulls the rug out from underneath something in such a massive way, and clearly people are worried that there's something bigger afoot. This kind of event is the kind of thing that will trigger volatility. This is not a one day thing now."
- Darren Courtney Cook (Head of Trading, Central Markets Investment Management) - "They’ve stopped defending the 1.20 floor. It’s carnage"
- Partick Jacq (Rate Strategist, BNP Paribas) - "The decision of the SNB means it no longer needs to buy euro-denominated paper in order to defend the 1.20 position. This should normally weigh on European debt but the SNB also said they will continue to monitor in order to prevent the exchange rate from rising substantially. This means that at the end of the day even if they don't defend the 1.20 level, if they want to prevent a collapse of the euro versus the Swiss franc they will probably have to keep on buying, maybe at a lesser extent, euro denominated paper"
- Jonathan Webb (Head of FX Strategy, Jefferies London) - "It has taken the market by complete surprise. The SNB probably expects the ECB to launch QE next week and along with the Greek elections coming up, it would make it pretty tough on the Swiss to keep bidding the euro. So they have abandoned the cap and cut rates deeper into negative territory. We expect euro/Swiss to trade around 0.90-1.00 francs after all the stop loss orders have been cleared"
- Geoffrey Yu (Currency Strategist, UBS London) - "They think too much money is going to come in, especially with QE coming, and so they think they need a 'Plan B'. Let it run, let it settle, and we'll see what happens next."
Removes EURCHF Floor & Lowers Already Negative Rates
In brief, the biggest story was had obviously been the Swiss National Bank (SNB) abandoning its currency peg or floor (the SNB defines this as the "minimum exhange rate of CHF 1.20 per euro"). The SNB started managing the level of which its currency, the Swiss Franc (CHF) trades against another specific currency, the Euro (EUR) in 2011 where by it was concerned about the CHF's overvaluation, a lot due to demand for safe haven currencies as risk assets saw heightened volatility back then. It then issued an ultimatum of a 1.2 EURCHF floor in which it would defend at all costs. EURCHF has never penetrated significantly under this floor since. Until now that is, and it has done with with no abandon.
Besides that shocker, it also lowered its already NEGATIVE interest rate to -0.75% from -0.25% (which is the lowest of of any central bank, easily trouncing the ECB's -0.25%). From the horse's mouth:
It is difficult to envisage reality with a base deposit rate of -0.75%, and it seems like the SNB together with the ECB are found of playing inside the monetary twilight zone of NIRP (negative interest rate policy). Imagine having to pay to deposit your cash in a bank. This how absurd NIRP is, but central banks always love the absurd. The more the merrier.
The previous twilight zone was ZIRP (zero interest rate policy); the ante has been upped, and will continue to be upped as deflation reigns in hard on the financial markets (see here and here); and central bankers who so live comfortably in their ivory towers face the reckoning they have detested since Bernanke coined his "helicopter money" theory.
Again, without going too deep in down the rabbit hole, it is highly unlikely we see persistence in the strength of the CHF in light of the -0.75% deposit rate the SNB pays. Unless of course markets see a seismic shift in risk appetite; it would be an entirely different ball game then. But as for now, sit back, and enjoy the carnage, assuming you aren't already a carcass.