16th Jan 2015 14:51
LONDON (Alliance News) - Forex brokers and trading platforms were Friday counting the cost of the Swiss National Bank's surprise decision to remove its long-standing ceiling against the euro, with the subsequent sharp rise in the value of the Swiss franc amid drying up liquidity catching out market participants across the world.
In the UK, Alpari (UK) Ltd, the foreign exchange online trading website that sponsors West Ham United Football Club, Friday said it has been forced into insolvency by the Swiss National Bank's removal of the cap on the Swiss franc against the euro.
The Swiss central bank's move has prompted London-listed online foreign exchange trading providers to update the market on their exposure to the rise in the franc. London Capital Group Holdings PLC said the impact on its balance sheet won't exceed GBP1.7 million, a day after IG Group Holdings PLC said it was looking at a loss of up to GBP30 million. Plus 500, listed on AIM, said the volatility had had "no material impact" on its financial and trading position.
Meanwhile, CMC Markets, the privately held online trading company that was founded as a foreign exchange broker in 1989 by entrepreneur Peter Cruddas, said that CMC sustained "some losses, however, the overall impact including possible bad debts has not materially impacted the group".
IG Group shares were down 0.9% at 703.00 pence on Friday, though the stock had traded in excess of 730 pence prior to the Swiss National Bank's decision. Plus500 shares were up 0.5% at 605.56 pence, while London Capital Group shares were down 18% at 34.00 pence.
In a statement, Alpari UK said the "exceptional volatility and extreme lack of liquidity" caused by Swiss central bank's move resulted in the majority of its clients sustaining losses which exceeded their account equity.
"Where a client cannot cover this loss, it is passed on to us. This has forced Alpari (UK) Limited to confirm today, 16/01/15, that it has entered into insolvency," Alpari UK said in a statement on its website.
Retail client funds continue to be segregated in accordance with the Financial Conduct Authority's rules, Alpari UK said.
The decision to scrap the ceiling took the markets by surprise, after the SNB had said as recently as December that it was committed to preventing the franc from strengthening beyond SFR1.20 to the euro.
The defence of the peg was becoming more costly as the Swiss currency was attracting fresh safe-haven flows from investors worried about the economic situation in Europe and the crisis in Ukraine. In its effort to weaken the franc, SNB had increased its foreign currency assets to CHF495 billion by the end of December, a strategy that greatly increased the bank's exposure to currency fluctuation risks.
The SNB said that although the franc was still high, its overvaluation has decreased because the depreciation of the euro against the dollar means that the franc has also weakened against the US currency. "In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified," it said.
Analysts said they think the Swiss Central Bank also has prior knowledge that the European Central Bank is about to embark on a bond-buying programme in an attempt to bolster the eurozone economy by flooding it with cheap money. That would have made the defence of a currency peg even harder.
The SNB also Thursday cut the interest rate on deposit account balances to minus 0.75% from minus 0.25%.
The policy change had initially prompted Alpari UK to say that it had been experiencing a high volume of client enquiries, leading to a backlog.
London Capital Group said it faces a balance sheet hit from market and credit exposure of up to GBP1.7 million, with the final amount depending on its ability to recover client debts.
"All clients' positions were closed at a more beneficial level than the company could close its own exposure. The group is well capitalised with a strong balance sheet upon which the recent events relating to the Swiss Franc has had no material impact," London Capital Group said in a statement.
CMC Markets said it is still on course to beat last year's financial performance.
"The Group?s balance sheet post these events remains strong, with a regulatory capital ratio of 24%
(300% pre CRD IV) and own funds in excess of GBP130 million. All retail client funds are fully segregated," CMC Markets Chief Executive Peter Cruddas said in his company's statement, adding "It's business as usual".
On Thursday, IG Group, a FTSE 250 constituent that provides contracts for difference and spreadbetting, had said it was facing a hit of up to GBP30 million over the volatility of the Swiss franc, with the precise amount to be determined by the group's ability to recover client debts.
"The market exposure occurred where client positions were closed at a more beneficial level than the company was able to close its entire corresponding hedge due to the market dislocation," IG Group said.
Plus500, which provides retail investors with online foreign exchange trading services, told investors that it was experiencing a profitable trading performance on Thursday, citing the "robustness of its risk management policies and processes".
"The company's proprietary risk management system ensures that overall exposures to a single instrument, such as the Swiss Franc, are unlikely to have a material impact on the company's financial position. The company wishes to remind investors that its customers are unable to lose more than they deposit with the company and hence the company has no credit exposure to its customers," Plus500 said.
By Samuel Agini; [email protected]; @samuelagini
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