
Brokerage Hit by Swiss Shock Gets $300M from Jefferies Owner Leucadia - nltkbot
http://www.businessweek.com/news/2015-01-16/fxcm-gets-300-million-bailout-from-leucadia-after-swiss-shock
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adventured
The Swiss have taken a lot of blow back for the damage this has done to all
sorts of businesses and individuals, from big banks to brokerages to mortgage
holders in Hungary, but they had no great alternative.

Once it became clear the ECB was about to take the reins off when it comes to
QE, the Euro was guaranteed to sink substantially, leaving the Swiss forced to
foot the bill on a pegged hole that would be theoretically infinite (only
theoretically). At the very least, the Swiss National Bank was going to
partake in a mult-billion dollar losing effort - for no good reason - to try
to keep the Franc capped against the Euro, while facing off against one of the
most powerful central banks in the world. The only question then would be how
much the Swiss would lose between now and capitulation later.

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Normati
If they really had no great alternative, and the chain of reasoning was that
clear, then traders would have anticipated it and it wouldn't have caused any
major problems.

Since it was widely unexpected and people did lose piles of money, I expect
there were other likely alternatives and perhaps your analysis may be
suffering from a bit of post-hoc rationalization.

~~~
RockyMcNuts
You can't just assume a free market discounting future events. The SNB was
pegging the currency at an artificial fixed rate v. the euro. Which is of
course the opposite of a free market and preventing the price from reflecting
the expectation of the market.

So, traders start to anticipate a revaluation and buy francs. The SNB has to
print and sell francs to maintain the peg. The SNB becomes aware that it is in
an untenable position and will have to print a multiple of Swiss GDP worth of
francs and effectively prop up the euro.

They have nothing but bad choices: buy an unlimited quantity of euros right in
the face of QE; re-peg at a higher rate or against a different currency, but
have an arrow painted on their back that the new rate may not hold; or float.

So, they float. Now the traders at retail brokers like FXCM who got hurt
weren't necessarily net short on balance. The problem is FXCM allowed 50-1
leverage. Say you have accounts with $40m of equity taking $2b of short
exposure to swiss franc, and foolishly going long a high yielding currency to
pick up carry. And you could have 10x or any number of accounts correctly
anticipating and going long francs.

Now, the franc jumps 20% without any opportunity to cover shorts. On 50-1
leverage the $40m equity accounts with $2b exposure $400m, or 10x their
equity. A client has a $10k brokerage account and loses $100k, the broker
can't recover that from them in most cases. The people who anticipated and
were on the right side of the trade make out like bandits. But the broker
still has to cover for all the losers so they are SOL.

TL; DR - Going from an artificial peg to a free market rate, you can't say
that the artificial peg discounted all future events. Obviously the rate
needed to adjust to do so. And even if a lot of traders correctly anticipated,
FXCM foolishly put themselves in the position of having to cover those who
didn't.

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dantiberian
The article suggested that some of the brokerages may not seek repayments from
their clients that owe them money. Why is that? I assume the contracts they
sign are iron clad, is it just that the losses are so large that their clients
couldn't repay it?

~~~
justincormack
Consumer contracts (vs business ones) are rarely "iron clad". The idea you can
go to someone and say ok you know you were doing some gambling with a stake
you paid me, well you lost and now I want $200k is not going to go down well.

