Following the decision on 15 January 2015 by the Swiss National Bank to lift the cap on the value of the Swiss Franc against the Euro, the value of the Franc has soared. As a consequence, markets have been heavily affected, none worse than the retail forex trading market. The abolition of the Franc’s peg at 1.20 to the Euro has led to market turmoil and a ripple effect not only in forex trading circles, but also throughout banks and hedge funds. The fallout from the Swiss National Bank’s decision has resulted in major losses, particularly within retail brokerages.
The unprecedented sudden movement in the market of 1-2% (in contrast to normal fluctuations of 0.1%), caused the value of the Franc to soar by a record 30%. Brokers are currently attempting to recoup the losses from their customers; however, these losses are significant and may be difficult to recover fully. FXCM Inc., one of the largest US platforms which caters to online retail trading of foreign currencies, has been heavily hit, suffering losses of $225 million (£148 million) following this currency volatility. Since suffering these losses, FXCM has received emergency funding from Investment Bank Jefferies.
One of the UK’s most prominent retail foreign exchange brokers, Alpari, was forced into administration on 19 January 2015 after failing to find a buyer for its company. Alpari was undoubtedly one of the most heavily affected casualties of the recent sudden appreciation of the Swiss Franc.
A profit warning was issued by IG Group warning investors that the unexpected move in the value of the Swiss franc will negatively affect IG’s profits and earnings. The losses suffered by IG are estimated to not exceed £30m, comprising of £12m of market losses and £18m of client exposure. However, IG has said that it will aim to maintain its dividend at the same level, even if earnings per share are lower as a result of this movement in the market.
Recent turbulence in the forex market has shed light on a sector which has grown rapidly, most noticeably in the past five years. With relatively light regulations, the sector allows private individuals to speculate on the forex market with access to vast amounts of leverage through online foreign currency trading platforms. Retail forex trading has recently been referred to in the press as ‘the closest thing you can get to casino gambling in financial services’.
According to a report by Citi, the individuals betting on these platforms now make up approximately 20% of the market, in contrast to just 10% in 2008. If losses continue to increase, regulators may need to look more closely at online retail brokers.
It is clear from this unexpected news that the forex sector is in for a very bumpy ride over the near future. Michelmores are both on hand to discuss any concerns surrounding increased regulatory and trading risks.