01/17/2015
Surge of Swiss Franc Triggers Hundreds of Millions in Losses
By Ira Iosebashvili, Andrew Ackerman and Alexandra Wexler
Banks, brokers and individual investors were left with hundreds of millions of dollars in losses a day after an unexpected surge in the Swiss franc sent shock waves through markets.
Shares of FXCM, one of the largest retail currency brokers in the world, were suspended on the New York Stock Exchange on Friday after the company said client losses on Swiss franc trades threatened to put it in violation of regulatory capital rules.
The two-year loan, with an initial interest rate of 10%, is “designed to maintain FXCM’s financial strength and allow it to prosper going forward,” said Leucadia Chief Executive
FXCM didn’t respond to a request for comment.
Other firms were hit when the Swiss currency jumped by nearly 30% against the euro and 18% against the dollar in the minutes following the
Among hedge funds suffering losses: Discovery Capital Management LLC, a South Norwalk, Conn., firm that manages $14.7 billion, and Comac Capital LLP, which oversees $1.2 billion in London. Comac was down roughly 8%, according to a person familiar with the firm.
Meanwhile, staff for members of the Financial Stability Oversight Council, a group of senior U.S. regulators, spoke by phone Friday to discuss the market’s reaction and the impact on specific financial institutions, according to a person familiar with the call. The discussion didn’t suggest there was an immediate threat to the financial system, this person said.
FXCM was founded in 1999 as one of the first currency brokerage firms to serve retail customers. In recent years, the company has expanded by acquiring weaker rivals, as a yearslong period of modest swings in foreign-exchange markets led to reduced trading and industry consolidation.
For years, foreign-exchange brokerages that catered to mom-and-pop investors operated outside significant oversight and were magnets for potential fraud. That all changed with the 2010 Dodd-Frank financial-overhaul law, which for the first time gave the Commodity Futures Trading Commission regulatory authority over the brokerages.
FXCM was among several firms that fought CFTC efforts to limit leverage at 10 to 1, saying in a March 2010 letter the proposal would have a “devastating impact on the retail [foreign-exchange] industry” and “drive it largely overseas.” The letter was signed by FXCM Chief Executive Drew Niv and eight other brokerage CEOs. The limit eventually was set at 50 to 1, meaning an investor could borrow $50 for every dollar put in.
News of the Swiss National Bank’s decision broke early Thursday morning in Belize. By the time Mr. Smallwood had finished his morning coffee, the franc had soared past his stop-loss order, exposing him to losses. FXCM sold off his position, a dollar amount he puts in the five figures, at 0.88 francs on the dollar.
Mr. Smallwood, who doesn’t use any leverage on his account, typically limits his positions to 1% of his total assets. He said he lost close to 5% of his account on the franc trade.
Mr. Smallwood, who said he is shifting his assets around to other brokers and other markets, blamed the problems at FXCM in part on other traders who use borrowed money in a bid to bolster returns.
On Friday, both the dollar and euro gained about 2% against the franc, after ending Thursday down 21% and 23%, respectively.
FXCM went public on Dec. 3, 2010, raising $211 million at $14 a share. But FXCM’s shares performed poorly. The stock fetched $12.63 at Thursday’s close and was down about 70% in after-hours trading Friday, at $3.75.
Matthew Wilhelm, principal at Lucid Markets Trading Ltd., an electronic-trading firm, sold 481,228 shares of FXCM in November, according to SEC filings. In June 2012, FXCM purchased a 50% controlling stake in Lucid Markets for $176 million, and Mr. Wilhelm received 5,284,045 shares as part of that deal, according to SEC filings. He didn’t return calls seeking comment.
Another big stockholder of FXCM has also sold large amounts of shares in recent months.
“I wanted the cash, so I sold some,” Mr. Romersa said. “I’m 68 years old. What am I going to wait for, until I’m 78?”
—Juliet Chung, Daniel Huang and Ryan Tracy contributed to this article.
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