Nearly a couple of weeks have passed since the SNB surprised the markets by scrapping its franc peg and causing a bit of chaos in the forex industry. How are brokers dealing with the aftermath and are regulatory agencies taking action?
In case you’re scratching your head and wondering how much of a mess the SNB shocker has created, you should read the following articles first:
Although a good bunch of forex brokers were able to temporarily able to suspend franc trading then and protect their clients’ accounts, other brokers were forced to declare insolvency (Alpari UK) or shut down completely (Global Brokers NZ Ltd. and Excel Markets). The rest are still left with the very difficult process of collecting payments from clients with negative balances, particularly from over-leveraged accounts.
FXCM, which has secured a $300 million loan from Leucadia National Corp in order to meet its regulatory capital requirements after suffering $225 million in losses during the SNB announcement, indicated that it plans to make loan payments using the accounts receivable related to the customer debit balances. If the firm isn’t able to collect enough cash from its clients’ debts to make loan payments, they might be forced to sell the company.
Several brokers have already started sending emails to their clients informing them of their obligation to settle their trading account deficits while others such as Gain Capital’s Forex.com retail branch decided to announce that they will be forgiving negative account balances, citing that it would make more business sense to just accept the losses instead of losing most of their clients.
Other forex brokers have made trading adjustments on franc pairs in order to prevent massive account losses in case another SNB surprise takes place. Swiss broker Dukascopy decreased leverage for EUR/CHF to 1:10 while U.S. regulatory agency NFA advised brokers to increase margin requirements for CHF pairs to 5% or 1:20 leverage. The NFA has also requested brokers to increase margins/reduce leverage on currency crosses including the Japanese yen and Australian dollar and on exotic currencies, such as the Brazilian real and Russian ruble.
Apart from serving as a lesson on the dangers of over-leveraging for retail traders, the SNB shocker and its aftermath was also a wake-up call for forex firms and industry regulators in reminding that proper risk management is key to survival. Bear in mind that while Alpari UK’s 1:500 leverage sounds very tempting, it was also the culprit for the downfall of their clients and the company itself.
Got any horror stories to share on the SNB announcement? Or were you one of the lucky ones that day? Check out these forum threads to see what your fellow forex traders have to say!