FXCM reported that it lost $225 million as a result of Swiss National Bank surprise move of unpegging Swiss franc from euro. High quality global journalism requires investment. Alpari UK has reportedly filed for insolvency when it suffered heavy losses as CHF appreciated almost 41% without any warning wiping out the accounts of many of its clients. The losses suffered by the clients get passed on to the brokers which in this case was Alpari UK. Citi reported a loss of $150 million. These firms suffered heavy losses because of their lax risk management policies. In future forex brokers will have to be very strict with their risk management policies.
However there is one company that has benefited from this Swiss shock therapy. While some companies went bust and others teetered on the brink of insolvency by the Swiss franc shock, Gain Capital was only shocked that it took so long. “I think the shocking news was the timing and not the action because this is a pressure pot that has been stewing for at least six to nine months,” said Glenn Stevens, CEO of Gain Capital said in an interview with CNBC on Friday.
Many forex brokers pass on their clients trades to the liquidity providers. Liquidity Providers are mostly large banks. The world’s biggest liquidity provider at the moment is Deutsche Bank, also known as a leading retail and investment bank. Now this is what happens. Forex brokers have an Omnibus account with their liquidity provider. This omnibus account contains all the client fund deposits. So in essence the client funds are pooled in this omnibus account which holds all the trades being made by the clients. The broker has a segregated company account. When something like that which happened this week occurs and their is a sudden massive spike with no time to react, the client losses become astronomical, the losses are passed onto the broker as a rule. When a gap like the one that occurred on Thursday happens, brokers are supposed to fund it themselves. In the present case brokers have suffered huge losses due to their poor risk management except Gain Capital that is reporting a profit.
Lesson: In future forex brokers will have to be more strict with their risk management when it comes to dealing with the client deposits. We think more stringent rules will now be enforced to make sure positions are not over leveraged. For now FXCM seems to have been bailed out by the $300 million loan.