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The Swiss National Bank caused one of the biggest earthquakes in the global currency markets since the financial crisis as it gave up defending the Swiss franc against investors desperate for a safe haven against the eurozone debt crisis. It ditched its three-year-old cap of Swfr1.20 against the euro, imposed to stave off the invasion of cash-seeking protection from turbulent markets. Within seconds, the “Swissie” soared nearly 30% against the single currency with one investor describing the move as “like detonating a stick of dynamite in a dam”. The pound also plunged, along with all other major currencies.
Banks, brokers and individual investors were left with hundreds of millions of dollars in losses a day after an unexpected surge in the Swiss franc sent shock waves through markets. FXCM Inc., a major U.S. retail foreign-exchange broker, emerged as the biggest victim so far and had to be rescued by an emergency $300 million lifeline from investment firm Leucadia National Corp. Shares of FXCM, one of the largest retail currency brokers in the world, were suspended on the New York Stock Exchange on Friday after the company said client losses on Swiss franc trades threatened to put it in violation of regulatory capital rules. The two-year loan, with an initial interest rate of 10%, is “designed to maintain FXCM’s financial strength and allow it to prosper going forward,” said Leucadia Chief Executive Richard Handler .
Retail foreign exchange broker FXCM got a $300 million bailout on Friday after taking huge losses on the Swiss National Bank's (SNB) shock decision to drop its three-year-old peg of 1.20 Swiss francs per euro. Leucadia National invested $300 million cash in FXCM in exchange for a $300 million senior secured term loan with a two-year term and a 10 percent coupon. If FXCM is sold Leucadia will get a portion of the proceeds. (The terms of the final announcement differed somewhat from a draft obtained earlier in the day). FXCM shares plunged more than 70 percent in afterhours trading Friday. The stock was halted for the entirety of the regular session.
"Leucadia's support and this financing are by far the best alternative for FXCM, our customers, our shareholders, and all other relevant constituencies," FXCM CEO Drew Niv said in a statement.
FXCM warned Thursday evening that clients owed it $225 million and that it may be in breach of some capital requirements. The stock fell 90 percent in premarket trading Friday before being halted.
As recently as last January, the European Central Bank ranked FXCM as the world's third-largest retail foreign exchange broker. The rescue came just hours after foreign exchange broker Alpari UK entered insolvency following the Swiss National Bank's decision. Citigroup has also lost $150 million to $200 million on forex trading because of the Swiss moves, a source told CNBC, demonstrating the magnitude of impacts on the markets.
Rich Repetto, Sandler O'Neill principal, told CNBC's "Squawk on the Street" Friday that this "may be the event of the year when you talk about market movements." Repetto also said that leverage numbers need to be reexamined by regulators to help prevent these types of reactions in the future. The SNB said that linking the Swiss franc to the euro meant the currency had fallen dangerously far against the dollar.
“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 explained.
Simon Smith, chief economist at currency dealer FxPro, said: “The Swiss central bank has decided this is a battle it can’t win given the ECB is likely to do QE next week or at least in March.” He added that “pressure had been building” on the currency cap due to the swissie’s traditional status as a safe haven.
“But at this point in time, the SNB has broken a dam wall and the waters have flooded out.” Foreign exchange expert Gain Capital’s research director, Kathleen Brooks, added: “If the SNB is so spooked it is disbanding with a policy that it has held dear since 2011, then the rest of the market may want to reconsider their expectations for next week’s ECB meeting.”
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