FXCM, Alpari, Where to now for Forex?
FXCM, Alpari, Where to now for Forex?
by Bill Hoerter of Trading Street January 16, 2015
This article is for two kinds of readers: the sophisticated trader/investor who understands capital investment globally, as well as the trading hobbyist. Arguably the most important event in the foreign exchange marketplace in the past 20 years has taken place Thursday of this week with the Swiss Central Bank, or SNB, deciding to suddenly reverse a long-standing policy of capping the value of their Swiss Franc (at 1.2000 EUR) for a number of reasons that we will look at in a moment. This most extraordinary move is being viewed with remarkable passivity in many quarters so far, the event being only a tad over 36 hours old as of this writing, but we believe that a wholly arbitrary maneuver like this will ultimately meet with tremendous scorn and reverberate in the halls of finance globally for some time to come.
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End of Note
Updates on Particulars
As of the London close today, Friday, January 16, 2015, a few firms have publicly made their solvency positions known. Alpari UK, the Russian-owned electronic broker has declared insolvency. This happened almost immediately in response to the SNB’s move. They are claiming that their other businesses will not be affected, but this remains to be seen. Alpari could potentially be situating themselves for another suitor, or simply getting in front of an inevitable negative equity position in response to client claims.
FXCM has made clear that a loss of minimum $225M would sideline them as a regulated Forex dealer as they would fail to meet their market capitalization requirements mandated by their regulators. They are clearly too valuable to “fail” in the modern sense of the term, so we would expect a private equity bailout. Jefferies has been prominently mentioned this morning, for a roughly $200M buy-in.
Some smaller brokers will be taken completely out of the marketplace, while others will position themselves for acquisition and a buyout of their client books, while still others will clearly state that all is good, and in certain cases will become suitors of rival firms. Rumor has it that IG Group is on the hook from its FX client positions for an estimated $45M, but likely will remain solvent and in fact may declare themselves a potential suitor for rival brokers. Their roughly $300M in profits for fiscal 2014, and over a half billion USD in cash reserves virtually guarantee that they will cover their losses and possibly do very well in this shifting environment. Their Nadex division should remain in solid stead.
Interactive Brokers likewise took a large positional hit as several of their large customers took losses in excess of their deposits but the amount, an estimated -$120M is less than 3% of their net equity, and should have little effect on the company as a whole. Other firms such as Saxobank and Dukascopy had well balanced risk and will continue to thrive, and likely pick up considerable moveable accounts. On the other hand, smaller, more exposed firms such as New Zealand-based Global Brokers NZ Ltd, have simply gone out of business. However, every firm large and small will be working over the coming weekend.
Hero or Villain?
This move by the SNB is a dangerously offhanded move for the kind of behavior expected from central banks and the folks who run them. The guiding hand of SNB, Thomas Jordan was elected to replace his successor, Philipp Hildebrand, who resigned with a hint of scandal after two very costly currency interventions in 2009/10 allegedly hit his country’s reserves to the tune of $40B. His wife front-ran the move by buying currency for their own account prior to the event in 2011. The establishment of a ceiling of the Swiss Franc, or “pegging” the value of the Swissy to the EUR, which was clearly defended just days ago by SNB Vice President Danthine, who stated that the ceiling “must remain the pillar of our monetary policy,” according to Bloomberg.com in today’s edition. This EUR floor was to be the SNB’s counter to anticipated manipulation of the Euro via the announced quantitative easing, or QE, by the ECB, the Eurozone’s central bank.
The normally staid, 51 yr old head of the SNB, Thomas Jordan, will have to answer for this maneuver, grossly exaggerating the value of their currency some 40%
and more instantaneously, to some of Switzerland’s largest corporations, arguably hurt by this move. A few other angry victims of this unprecedented move will include the entire Russian banking system, whose tsunami of outflows and hammering of their Ruble of late, have been hedged largely in the Euro and Swiss Francs.
The “intervention” is being defended by some today as a decision to get in front of the potential continued selloff of the EUR prior to the beginning of the QE program next week, as if a 4500 point move is a normal procedural. Why, however, a European central banker would decide to take on a fellow institution like the ECB, supposedly professionals fighting the same fight, will be the big question as Mr. Jordan’s fate is decided in weeks to come.
What of the Industry at Large?
At this point, declaring the “end of retail FX”, as you will read about in forums from bored traders around the world today, is a matter of some skepticism to this old industry hand. There certainly will be ramifications though, all of which will be as a result of firms going out of business or taking huge losses. These actions are in some cases due to the poor risk management of balance sheets via naked, unhedged, or improperly-hedged exposures, and possibly questionable practices of outright covering of client positions.
This will bring the regulators crawling around boardrooms and poking through ledgers both large and small. The problem here, though, is a fairly simple concept –
leverage. Retail FX in the US has been pegged at a maximum of 50:1, or 2% margin, but non-US players routinely offer from 100 to 500:1 leverage which if not their death-knell, will certainly end as a routine hustle to attract reckless retail traders. The NFA has lobbied at various times for as little as 10% and as much as 100% margin requirements for FX positions in past proposals, and have settled for the current levels – but this will change. Non-US regulators, particularly the UK’s FSA will no doubt slap additional restrictions of their own on trading margin. Proprietary trading firms and those who hold client funds will have a punitive round of capital requirements and fees slapped on them. All of which will shrink an already tight trading environment.
No matter how you feel about speculative FX trading, this sea-change in our wonderful industry, for good or bad, is at the feet of a formerly mild-mannered central banker who decided literally on his own to change the financial world in a single blow. We know exactly who to blame or thank for this generational change, Thomas Jordan – for now the head of the SNB.
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