FXCM (FXCM) Could be Insolvent After SNB Move
Shares of FXCM Inc. (FXCM) were trading down -11.00 or -87.09 percent to $1.63 per share in this morning's premarket. The company is trying to meet capital requirements after many of its clients lost massive amounts of money in the Swiss Franc after the Swiss National Bank removed its peg on the Euro. FXCM stock closed at $12.34 per share, down -2.24 or -15.06 percent in Thursday's regular trading session.
FXCM allows customers to operate in the forex market with leverage and "direct market access", meaning that FXCM takes a number of markets from different dealers and lets the client have the best price on any given trade. The company had it initial public offering in 2010 at $14 per share and has offices in major cities around the world.
FXCM announced this morning that it might be in breach of some regulatory capital requirements because of the unprecedented volatility in Swiss Franc currency pairs after the move by the Swiss National Bank or SNB. The SNB removed a three and half year old peg on the Euro in a surprise move yesterday, making the Swiss Franc rally more than +30 percent.
The movement in the EUR/CHF currency pair led to significant customer losses, triggering margin calls. Because of the sudden crash in the currency rate, FXCM was left with a negative equity balance totaling -$225 million. The company said in a statement that, "We are actively discussing alternatives to return our capital to levels prior to today's events and discussing the matter with our regulators."
Another forex broker, Alpari UK, headquartered in London released a statement announcing they had entered insolvency due to volatility in the Swiss Franc. Alpari stated that, "The recent move on the Swiss franc caused by the Swiss National Bank's unexpected policy reversal of capping the Swiss franc against the euro has resulted in exceptional volatility and extreme lack of liquidity, this has resulted in the majority of clients sustaining losses which has exceeded their account equity. Where a client cannot cover this loss, it is passed on to us."
Alpari said that both its primary and secondary liquidity providers â?? large financial institutions that make markets in the currency pairs ÃƒÂ¢?? had gone unresponsive for hours after the announcement by the SNB.
Credit Suisse analyst A. Serreo said that they "believe FXCM's liquidity provider stopped making markets in the Swiss Franc leaving the company unable to close losing client positions as the cushion provided by client collateral was absorbed." Credit Suisse downgraded FXCM from Outperform to Underperform, reducing their target price for FXCM stock from $18 per share to $4 per share.
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