By Chiara Albanese
Foreign-exchange broker FXCM Inc. will stop trading a number of
currencies later this week to avoid volatility caused by possible
future intervention by governments in currency markets, according
to a person familiar with the matter.
The New York-based broker lost millions of dollars following the
sharp currency swings resulting from the Swiss National Bank's
decision to remove its cap on the value of the franc on Jan. 15. It
has begun notifying clients that on Feb. 20 it will remove a number
of currencies, including the Hong Kong dollar and Danish krone,
from its platform, the person said.
"We are removing currency pairs from the platform that carry
significant risk due to overactive manipulation by their respective
governments either by a floor, ceiling, peg, or band," said the
firm's chief executive Drew Niv.
After the 30% move in the Swiss franc exchange rate which
followed the central bank's removal of the cap on the value of the
currency earlier this year, FXCM was left chasing about $225
million from retail clients who were caught on the wrong side of
bets on the Swiss franc. Collateral put down to guarantee those
bets wasn't sufficient to cover the currency move on that day,
which was unprecedented.
In order to continue operations, FXCM secured a $300 million
loan from Jefferies Group LLC-parent Leucadia National Corp.
"Given what happened with [the franc], the industry is now
looking very hard at potential similar issues especially given the
increased geopolitical risks in Southern and Eastern Europe," Mr.
Niv said.
Under the changes, beyond major currencies, FXCM will only offer
trading in the Turkish lira, the South African rand and the Chinese
renminbi. It will also increase the margin requirements that
clients will have to pay to trade in these currencies.
Fearing similar market fallout to that seen in the Swiss franc
if more central banks, such as Denmark's, were to abandon their
currency pegs, some banks and brokers are implementing stricter
requirements for clients looking to trade those currencies.
The prime brokerage arm of Citigroup Inc., the largest dealing
bank for foreign exchange, is boosting its prices for clearing and
settling trades for selected currency pairs by about 25%, according
to a person familiar with the move.
Citigroup is FXCM's largest prime broker for foreign exchange,
and the division also provides clearing and settlement services for
institutional clients, including hedge funds and retail
brokers.
The U.S. bank suffered about $150 million in losses following
the sudden surge in the Swiss franc following the central bank's
announcement last month, according to people familiar with the
matter.
Other banks are considering similar plans to increase the cost
of prime brokerage services, according to several people familiar
with the matter.
"Banks are reassessing their risk requirements, that's for
sure," said a New York-based senior foreign exchange trader.
The greatest focus, he added, is on the Danish krone, which has
been pegged against the euro since 1982 to keep inflation low and
provide stability for exporters. In an effort to stem inflows into
the currency and to keep the peg in place, the Danish central bank
has been forced to cut rates several times in recent weeks and
suspend the issuance of government bonds.
"If the peg goes away, banks would face similar risks to the
ones seen after the SNB decision," he said.
Gain Capital is among the brokers asking clients to put down
larger collateral to trade currencies. Starting Feb. 6, the U.S.
firm increased minimum margins for selected currencies including
the Danish krone, the renminbi and the Hong Kong dollar.
"In light of the recent decision by the Swiss National Bank to
remove the peg in EUR/CHF on 15 January 2015, there have been
increased market concerns about the soundness of other pegged
currencies," a spokesman said.
Interactive Brokers has also increased the margins required for
selected currencies. The U.S. broker is now asking a 5% margin for
the Swiss franc, compared with a 2.5% margin before Jan. 21, and a
20% to trade the Russian ruble. The previous margin was 15%.
Total losses faced by the largest currency prime brokers
following the Swiss National Bank move add up to several hundred
millions, according to several people familiar with the market.
Write to Chiara Albanese at chiara.albanese@wsj.com
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