WELLINGTON, NEW ZEALAND – Casualties mounted from the Swiss currency shock as a U.S. online brokerage said client debts threatened to push it out of compliance with capital rules and a New Zealand-based dealer went out of business.
FXCM Inc., a New York-based company that offers foreign exchange trading services over the Internet, said clients suffered significant losses when the Swiss National Bank’s decision to abandon the franc’s cap against the euro roiled global markets. Global Brokers NZ Ltd. said the impact on its business is forcing it to shut down.
“Due to unprecedented volatility in EUR/CHF pair after the Swiss National Bank announcement this morning, clients experienced significant losses, FXCM said in a statement dated Jan. 15. That “generated negative equity balances owed to FXCM of approximately $225 million.”
Dealers in London at banks including Deutsche Bank AG, UBS Group AG and Goldman Sachs Group Inc. battled to process orders yesterday when the SNB shocked markets with its announcement on Thursday morning in Zurich. The franc surged as much as 41 percent versus the euro, the biggest gain on record, and climbed more than 15 percent against all of the more than 150 currencies tracked by Bloomberg. Volatility jumped to a more than one-year high.
“The majority of clients in a franc position were on the losing side and sustained losses amounting to far greater than their account equity,” Global Brokers NZ director David Johnson said in a statement dated Jan. 15 and posted on the website of affiliated company Excel Markets.
Deutsche Bank was among dealers to suffer disruptions to electronic trading, with its Autobahn platform temporarily ceasing to provide quotes, according to a dealer from outside the bank.
“I would be astonished if we did not see more casualties,” Nick Parsons, the London-based head of research for the U.K. and Europe at National Australia Bank Ltd., said by phone from Sydney. “This was a 180-degree about turn by the SNB. People feel hurt and betrayed.”
The SNB ended its three-year policy of capping the franc at 1.20 per euro a week before the European Central Bank meets to discuss government bond purchases to boost the euro-area economy. Such a policy, known as quantitative easing, could add to pressure on the franc against the euro. The SNB spent billions defending the currency cap after introducing it in September 2011.
All client funds are in segregated accounts and “100 percent of positive client equity or balance is safe and withdrawable immediately,” GBL’s Johnson said. However, GBL had sustained “a total loss of operating capital.”
“The interbank market for francs was illiquid for hours after the event and no traders with an open franc position were able to close it for a significant period of time, at any broker,” Johnson said. Auckland-based GBL was experiencing “hundreds of withdrawal requests,” he said.