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.
FXCM Inc., a major U.S. retail foreign-exchange broker, emerged
as the biggest victim so far and had to be rescued by an emergency
$300 million lifeline from investment firm Leucadia National
Corp.
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 Richard
Handler.
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 Swiss National Bank's decision to stop reining in the
value of the franc against the euro.
Citigroup Inc. and Deutsche Bank AG will each lose about $150
million on the franc's appreciation, said people familiar with the
firms. Goldman Sachs Group Inc. said Friday that the franc's move
will be immaterial to its earnings. Losses at Barclays PLC will be
in the tens of millions of dollars, people familiar with the bank
said.
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.
Losses could be reversed, but the setbacks are the latest for
Discovery and Comac. Comac has been roughly flat the past two
years, while Discovery ended last year down more than 3% in its
flagship fund, after largely recovering from a
double-digit-percentage loss early in 2014, according to people
familiar with the firms. Bloomberg News earlier reported Comac's
loss.
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.
At the center of this week's turmoil, analysts said, was the use
by FXCM clients of borrowed money, or leverage. FXCM kept lower
margin requirements, or the amount held as collateral for a loan,
than its competitors, analysts said, a practice that enabled
traders to boost returns by using borrowed money.
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.
On Thursday, a unit of Chicago-based exchange and clearinghouse
operator CME Group Inc. tripled margin requirements for traders
using futures tied to the Swiss franc, according to an advisory
notice it sent to clearing members and risk managers.
Rick Smallwood, 43 years old, a technology consultant living in
Belize, began trading in Swiss francs last summer at FXCM. He said
he held a stop-loss order that aimed to benefit from the franc's
depreciation but would cap his losses if the franc appreciated
beyond 0.97 francs per dollar. A stop-loss order is placed with a
broker to sell a security when it reaches a certain price. The
franc traded Wednesday at 1.02 per dollar.
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.
"A lot of currency brokers are becoming insolvent because
they're letting people lever up so much," he said. "There are
people who trade responsibly that are exposed to more risk."
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. Michael Romersa, one of the firm's
founding partners and a former executive, sold 236,193 shares from
Dec. 19 to Jan. 9, according to SEC filings.
"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 and Daniel Huang contributed to this article.
Write to Ira Iosebashvili at ira.iosebashvili@wsj.com, Andrew
Ackerman at andrew.ackerman@wsj.com and Alexandra Wexler at
alexandra.wexler@wsj.com
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