Another Bailout: FXCM To Forgive 90% Of Its Mostly Foreign "Negative Balance" Customers

Tyler Durden's picture

Two weeks after FXCM was on death's door, and only a last minute vulture investment by Jefferies prevented the company from filing, FXCM has decided that it can't afford to blow up the bulk of its clients who traded the EURCHF on the wrong side, and as the company reported moments ago, will forgive their negative balances. In other words, another bailout for HFTs, and the rich and those habitually addicted to gambling in rigged markets, who just happen to be the lifeblood of companies like FXCM.

From the press release:

FXCM to Forgive Majority of Clients Who Incurred Negative Balances

 

FXCM Inc.announced today its decision to forgive approximately 90% of its clients who incurred negative balances in certain jurisdictions, on January 15, 2014 as a result of the Swiss National Bank announcement on that date. FXCM will notify the applicable clients and adjust applicable client account statements in the next 24-48 hours.

 

"FXCM worked diligently to reach this decision and we are extremely appreciative of our clients for their patience and loyalty as we worked through this," said Drew Niv, CEO of FXCM.

 

The SNB announcement, extreme price movements and the resulting lack of liquidity were exceptional and unprecedented events causing many market participants to incur trading losses. These events were unforeseen and beyond the control of FXCM.

 

FXCM will also notify certain clients (such as institutional, high net worth, and experienced traders who generally maintain higher account balances) requesting payment of negative balances, pursuant to the terms of the FXCM master trading agreements.  This group represents approximately 10% of clients who incurred negative balances  which comprises over 60% of the total debit balances owed.

Because without whale clients, no exchange can continue to skim off the bid/ask margin while suckering in more "overnight wannabe millionaires" with 200x leverage.

So who are the generous beneficiaries of this Jefferies-funded bailout? For the answer we go to the WSJ:

Retail foreign-exchange broker FXCM Inc. was nearly felled by outsize bets made by foreign customers who aren’t subject to U.S. regulations, according to people familiar with regulators’ review of the firm.

 

While some U.S. clients lost money when the Swiss National Bank scrapped a cap on the country’s currency, the bulk of the losses were borne by clients at FXCM’s affiliates in London, Singapore and other locations abroad, the regulators said. Those affiliates weren’t subject to leverage caps imposed by U.S. regulators, allowing overseas clients to make bigger bets—and take bigger losses.

 

As a result, FXCM said its customers owed the firm about $225 million, potentially putting the company in violation of capital requirements and forcing it to take a $300 million rescue from investment firm Leucadia National Corp.

 

The fallout illustrates both how a firm’s losses abroad can find their way to U.S. shores and that even relatively strict U.S. regulation can’t prevent losses in less-regulated jurisdictions. While regulators don’t believe the firm’s near-collapse posed any broader risks to the financial system, the incident is prompting them to consider whether their capital and leverage requirements are adequate for firms like FXCM, the people familiar with the review said.

 

In the U.S., the Commodity Futures Trading Commission and the National Futures Association, a self-regulator, currently limit leverage on transactions for retail, or individual, currency investors at 50 to 1. That means an investor can borrow $50 for every dollar put in. This is because currency moves are typically small. Many overseas jurisdictions have much looser limits, particularly in Europe.

It may not be Mrs. Watanabe exactly: meet Monsier Trepreau:

Maxime Trepreau, a 33-year-old engineer from Houilles, France, placed a bet on the euro to rise against the Swiss franc several months ago, after seeing the position recommended by an analyst on Daily FX, an FXCM-owned website. On the morning of Jan. 15, Mr. Trepreau saw the value of his account rapidly declining, despite an automated order he had to exit from the position and keep losses to a minimum if the trade went the wrong way. Currency traders say liquidity evaporated as the euro made a sudden fall, which would make it difficult to execute preset orders.

 

By the time his order was executed, Mr. Trepreau’s loss of €50,000 (more than $56,000 at today’s rate) had eaten up all of the funds in his FXCM account and left him with a negative balance of €2,000.

 

Mr. Trepreau says FXCM hasn’t told him whether he is on the hook for that amount. Mr. Trepreau believes he shouldn’t be.

And just like Apple, the bulk of marginal growth when it comes to FX gambling is now in Asia:

In 2014, 41.5% of FXCM’s business by volume came from Asia; followed by 35.9% from Europe, the Middle East and Africa; 13% from the U.S.; and 9.6% from the rest of the world, according to its website.

In shart, thank you Dick Handler: Mrs. Watanabe, and Mr. Trepreau, are most grateful.

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GetZeeGold's picture

 

 

Mulligans.....great idea!

 

We should have mulligans for everything....why the hell not?

LetThemEatRand's picture

"In shart, thank you Dick Handler"

Best laugh of the day.

CrazyCooter's picture

I guess this puts a price tag on how much they skim from said customers being as they have to be able to make this back in a reasonable period of time (and then some)!

Yikes!

Regards,

Cooter

PartysOver's picture

Just wonderful.  The Entitlement Mentality has spread to FX traders.   As they are entitled to have their committments (negative balance) forgiven.  And this is different from Greece because ........

ilion's picture

One of the competitors of FXCM who promised to start consolidation process in the FX industry just appointed ex-GFT executive as new CEO to get things going:
http://www.tickmill.com/company-news/tickmill-appoints-sudhanshu-agarwal...

aPlayer's picture

The FX industry will see the mother of all consolidations happening over the coming 24 months. My bet is that FXCM will not be around when this happens, it is a damaged brand.

RaceToTheBottom's picture

"The Entitlement Mentality has spread to FX traders."

It is all driven by intent.  Their intent was to make money, so therefore, they should all make money.

Works for Banksters....

Paveway IV's picture

I hated Jefferies for years for some other reason unrelated to this, but I honestly can't remember what it was. I was never personally involved with their firm.

NoDebt's picture

In shart.  

Indeed.  

Best typo ever.  Shitgums all around.  My treat.

dead hobo's picture

Of course, the bailout will be taxable income to all US taxpayers who receive one. Will each bailee get a 1099 too?

forexskin's picture

In shart, thank you Dick Handler: Mrs. Watanabe is most grateful.

Would that be a solid, gaseous, or liquid bailout?

SethDealer's picture

markets and those who control them have no integrity

ZH Snob's picture

if Jeffries bailed out FXCM, isn't it they who are forgiving these negative balances?  that doesn't sound like your average vulture to me.

schadenfreude's picture

I think they hope to recover some margin calls of the big fish clients.

JRobby's picture

Like a video game

Reset!

That won't reinforce any reckless behavior. no.

Cheduba's picture

Thank the FSM we live in a world with no consequences...for them at least.  Oops, I certainly didn't mean to bet my money that way if I was going to end up with losses!

Whatever happened to no take backsies?

StychoKiller's picture

Where were these hucksters when I lost munny in the stock market(s)?

TruthInSunshine's picture

Bailouts for everyone forever.

ZIRP/NIRP too.

Anally rape what's left of the middle class to subsidize the welfare recipients that are the poor & the rich.

0% Corporate tax rates & government (taxpayer) risk free loans to GM,Solyndra-like firms, IBM, Soros & Buffet entities...

SheepDog-One's picture

Yea, I'm sick of being the one that's expected to work so others can party and get free gifts all day, fuck this.

TruthInSunshine's picture

Obama: A real hero & champion of Middle Class Americans (what are left of them):

http://jackbaruth.com/wp-content/uploads/2015/01/The-Tech-Supper.png

LawsofPhysics's picture

Yep, this will definitely impact supply lines now. 

JRobby's picture

ZIRP / NIRP

All lending controlled by the largest banks so they can choose who grows and who doesn't. Sounds like a planned economy to me?

Smaller and some regional banks are a good bet and it would be great to return to that lending model. HOWEVER, ask anyone who works in a smaller bank. They will tell you that they are held to a much, much higher standard of compliance than larger banks and especially TBTF's.

Stained Class's picture

Might as well do it this way, since they wouldn't be seeing any money anyway. It would probably cost them MORE money fighting attorneys who claim their clients were unsuitable for the amount of risk FXCM offered.

ArkansasAngie's picture

Collecting from CHinese day traders?  How about a condo in a ghost city?

insanelysane's picture

When they bailed out the banks during the housing collapse, I don't remember them forgiving the debt of the mortagagees.

NotApplicable's picture

That's the difference that "recoverable assets" make.

kaiserhoff's picture

Yup, that and legal cost triage.

They can't afford to be in arbitration/law suits with half of their customers.

And their advice sucked, which puts them in an unflattering position.

De nada.  The next bump in the road will wipe them out.

 

saveUSsavers's picture

That would have needed to be $1.5 Tril or more, and they forgave the taxable gain on short sales for the LIAR mortgagees, the arsewhole liar-borrowers don't get my sympathies.

ArkansasAngie's picture

So winners and losers made out like bandits

 

Romney Wordsworth's picture
Romney Wordsworth (not verified) ArkansasAngie Jan 28, 2015 10:23 AM

I'm thinking that they looked at their client list and, seeing a bunch of Goldbergerfinchensteins on it, decided to capitulate.

toady's picture

And Hitler. Can't forget about Hitler.

Romney Wordsworth's picture
Romney Wordsworth (not verified) toady Jan 28, 2015 11:26 AM

Evidently <above> I got junked by Larry Silverstein [and it paid out DOUBLE].

youngman's picture

I am going to jump into my margin account today...no need to pay it back if it goes bad now I see......the new economics of this century....the old way was if you lost...you lost...and you paid...not anymore....

DeadFred's picture

Be sure to stay in a US jurisdiction since a 40% move hurts much less when you're only leveraged 50:1. LOL, broke is broke.

hotrod's picture

GREECE has a negative balance.

Bill of Rights's picture

Drive by take down in metals happening...https://www.tradingview.com/x/vDmjBJAZ/

 

 

ejmoosa's picture

WTF!

 

All reward, and none of the risk.

 

medium giraffe's picture

Yup, a lot of the more popular fx shops did the same it seems.  Musn't interrupt the flow of the spice! Besides, I'm sure they did pretty well out of it, many of them make the market, so they are counterparty to the derivative trades that retail traders are taking.

Dr. Engali's picture

Damn! I never get a fucking do over when a trade goes against me.

NoDebt's picture

Read this paragraph over again.  Maybe you can make more sense of it than I can.  I've read it five times already:

"FXCM will also notify certain clients (such as institutional, high net worth, and experienced traders who generally maintain higher account balances) requesting payment of negative balances, pursuant to the terms of the FXCM master trading agreements.  This group represents approximately 10% of clients who incurred negative balances  which comprises over 60% of the total debit balances owed."

It sounds like they're NOT going to write off the margin loans for "insitutional, high net worth, experienced" traders.  They're going to write it off for 90% of the ACCOUNTS, but the 10% they're NOT writing off are the "big fish" that represent 60% of the margin loans owed.

So they're only wroting off the margin loans for the "small fish" in this case.  Yeah, it's 90% of the accounts, but it's only 40% of the margin loans owed.

Dr. Engali's picture

That's the way I read it. Let's face it the small fish don't have the means to pay back the kind of losses incured. It's in the firm's best interest not to waste resources chasing them down.

NoDebt's picture

I would think that's about right.

Next quarter they send out a letter to those clients:  

Dear valued customer, Would you like to play a game?  You did before, so maybe you'd like to play again.  Take a shot at getting back to even.  As you know, we forgave your margin account losses recently.  To give you a shot at recouping your lost principal, please feel free to take out a NEW margin loan with us TODAY!  We're cleared you for 1000X leverage on the balance in your account, small though it may now be.  Imagine how healthy you could get FAST with that kind of leverage working for you!  Watch videos on our website to get exclusive insights from our FX trading pros so you know where to invest and put all that massive leverage to work for you TODAY!  Remember, this is investing, not gambling.  You'll win if you stay in the game long enough.

Unknown Poster's picture

That's the way I read it. The question I have though is why? My guess is Jefferies is on the hook for CDS for more than what they are forgiving, Pure speculation of course, but why would they soak up the losses?

JRobby's picture

Similar to the IRS actions against "certain" UBS account holders.

Some not ALL. Which is how it all works here on Earth. So if you are in ALL and want to be in Some, watch your back.

dbown1959's picture

Buy fxmc & grek $$$$

SillyWabbits's picture

Is it a loss or is it not?

It depends upon what the meaning of is is.

Isn’t that ….. special!

Last of the Middle Class's picture

Unbelievable. We're all equal, just some more equal than others.