The number of casualties from the decision of Swiss National Bank to cease capping the nation’s currency is on the rise, and the damage is spreading from New York to New Zealand, with FXCM Inc., the biggest retail foreign-exchange broker in Asia and the U.S., saying it may be in breach of some regulatory capital requirements.
A small New Zealand currency trading house, Global Brokers NZ Ltd., said it would close its doors as it could no longer meet regulatory minimum-capitalization requirements.
SNB ditched its cap on the franc
As reported by ValueWalk, Swiss National Bank stunned the markets Thursday by scrapping its three-year old cap of 1.20 Swiss francs per euro. The central bank said the franc was now out of the period of “exceptional overvaluation” during which the minimum exchange rate had been introduced.
The SNB’s latest move unleashed new volatility among bonds and currencies around the world. SNB’s abandoning of the cap prompted a collapse of as much as 30% in the euro versus the franc – the biggest single-day move in a developed market that traders could recall.
FXCM Inc (NYSE:FXCM) said in a statement that due to unprecedented volatility in the euro against the Swiss franc, its losses left it with a negative equity balance of around $225 million and that it was trying to shore up its capital. FXCM Inc. said: “As a result of these debit balances, the company may be in breach of some regulatory capital requirements. We are actively discussing alternatives to return our capital to levels prior to today’s events and discussing the matter with our regulators”.
With around a $701.3 million market capitalization, FXCM Inc. is an online provider of foreign exchange trading and related services to approximately 183,679 active retail customers across the globe. Last quarter, FXCM Inc., handled a record $1.4 trillion worth of trades by individuals. Mirroring the latest developments, FXCM Inc’s shares plunged 15% in U.S. trading and tumbled another 12% after hours and are now down 82% in pre-market trading, indicating that investors believe the company may not survive.
FXCM analysts react
Most analysts have downgraded FXCM in an effort to play catch up. Analysts from UBS stated: “While we believe that the company has the financial resources to withstand this unprecedented event, we believe investors have too little information to
make a confident investment decision at this juncture”, putting the price target on hold due to what they called a Black-Swan Event.
Not only FXCM – Casualties in New Zealand and Australia
New Zealand currency trading house Global Brokers NZ Ltd. said SNB’s decision resulted in rare volatility and illiquidity in the currency market. The foreign exchange trading house said both its primary and backup liquidity providers became unresponsive or illiquid for hours after the event. Global Brokers NZ said the impact on its business is forcing it to shut down.
OANDA, an Australian currency house, also said it sustained losses amid “vanishing liquidity” in the market. The currency house said it forgave all negative client balances that were caused when traders couldn’t close out positions quickly enough.
Other major banks that had to grapple with the Swiss surprise include Deutsche Bank and HSBC. Deutsche Bank was among dealers to sustain disruptions to electronic trading with its Autobahn platform temporarily ceasing to provide quotes. HSBC Holdings Plc is investigating reports that customers in Hong Kong bought the Swiss franc below market rates when an online banking system failed to keep up with the currency’s gains after the removal of the cap.