Europe > Western Europe > European Union > Swiss franc fallout claims more casualties

European Union: Swiss franc fallout claims more casualties

2015/01/21

A leading European foreign exchange broker filed for government on Monday and a Danish bank conceded it faced heavy losses as the UK’s market regulator stepped in to assess the damage wreaked on the industry by last week’s violent swing in the Swiss franc.

The Financial Conduct Authority sent letters to an unspecified number of currency brokers on Friday asking them to update the regulator about any impact the Swiss move could have had on their balance sheets, according to a person familiar with the situation.

World markets were left reeling last Thursday at the same time as Switzerland unexpectedly abandoned its currency ceiling against the euro. In one of the majority damaging currency swings in the modern trading era, the Swiss franc soared in price, leaving investment banks across the world with large losses and hitting foreign exchange brokers particularly hard.

Alpari became one of the biggest casualties at the same time as a last-minute rescue ended in failure. Meanwhile, Denmark’s Saxo Bank was forced to admit on Monday that it was likely to suffer losses.

The fallout of the Swiss franc’s move has heightened scrutiny of a lightly regulated industry in which customers are often offered large amounts of leverage by companies to entice them to trade. London has been the venue for a lot of of these brokers as it remains the world’s major hub for currency trading.

Punters deposit money with the broker and use it as collateral to borrow a much larger all and magnify their trading positions. In London it is customary to offer 100-200 times the all deposited into an account, although higher sums are available.

Some brokers had a policy of covering client losses beyond their deposit in the short term, thus allowing customers to gear up their accounts. Violent market moves — such as that of the Swiss franc last week — mean investment prices fluctuate substantially and can trigger immediate calls for large payments of margin from customers, who may not be able to pay instantly.

SWIFTRef a financial institution or corporate

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