To find out how events unfolded at FXCM on the 15th of January and to shed light on the subject, Forex Magnates reached out to CEO Drew Niv of FXCM, one of the biggest foreign exchange brokers in the market. His full length interview can be read below.
1. What happened on January 15th after the SNB announcement? What was the immediate impact of the SNB announcement on the company’s systems?
At the time of the SNB announcement over 3,000 FXCM clients held slightly over $1 billion in open positions on EUR/CHF. Those same clients held approximately $80 million of collateral in their accounts. As you know this was the largest move of a major currency since currencies started floating in 1971.
The EUR/CHF move was 44 standard deviation moves, while most risk management systems only contemplate 3-6 standard deviations. The move wiped out those clients’ account equity as well as generated negative equity balances owed to FXCM of over $225 million. We believe that the FXCM system operated properly during this event.
The caveat of our no dealing-desk execution system is that traders are offset one for one with a liquidity provider. When a client entered a EUR/CHF trade with FXCM, FXCM Inc. had an identical trade with our liquidity providers. During the historic move, liquidity became extremely scarce and shallow, which affected execution prices. This liquidity issue resulted in some clients having a negative balance.
While clients could not cover their margin call with us we still had to cover the same margin call with our banks. When a client profits in the trade FXCM gives the profits to the customer, however, when the client is not profitable on that trade FXCM Inc. ends up having to pay the liquidity provider.
FXCM ended with a regulatory capital shortfall. Accordingly, FXCM needed to get a loan to cover this balance, which it did. For anyone that still thinks FXCM is running an FX dealing desk, we have now demonstrated that such is not the case.
2. Why do you think many people traded EUR/CHF with FXCM?
Because we are a no dealing-desk broker and offset each trade one-for-one with our liquidity providers, and only make money on trades not customer losses. We published a study a few years ago called “Traits of Successful Traders” that looked at FXCM traders over a long period of time and their general behavior to find what was destructive behavior to stay away from and what worked for clients.
The study focuses on what the majority of profitable traders did to increase their odds of success. What the study found was that traders who traded during quiet range-bound market hours like Asian hours OR that traded range-bound low volatility, currency pairs tended to be more profitable.
Obviously, many of our competitors who are on the opposite side of their clients’ trades did not find this trade to be helpful to their bottom line, as they lose money when traders profit. We saw many of the dealing desk firms begin to increase overnight rollover costs, as well as raise margin requirements to get these trades off their system and that’s why FXCM and other STP brokers had much bigger exposure.
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3. Why did FXCM require an emergency loan with such tough terms?
As a regulated broker we are required to notify our regulators in a timely manner when any event occurs that may be deemed sensitive to clients. When we notified the regulators, they required FXCM Inc.’s regulated entities to supplement their respective net capital on an expedited basis.
We explored multiple debt and equity financing alternatives in an effort to meet the regulator’s deadline. The deal we ended up doing with Leucadia was the only deal that could and would happen in the very short timeframe we were given by the regulators. The CEO and the president of Leucadia were here in the office working on the deal.
It was a tall order for someone outside of the FX industry to come in and write a $300 million dollar check. This was the type of thing only top management could do. But they see the sustainability of FXCM, and that was everyone’s end goal. We really are very thankful to Leucadia. The deal enables us to live and fight another day and gives us time to build shareholder value in the future.
4. You said you plan to pay back the loan with proceeds from sales of non-core assets, so what are non-core assets and will that be enough?
We announced last week that we anticipate that with the proceeds from the sale of some non-core assets and continued earnings we can meet both near and long-term obligations of our financing, while preserving the strength of our franchise. It’s widely known and understood that FXCM’s core business has always been retail FX. It is the majority of FXCM’s revenue.
However, over the past few years the company has spent over $250 million dollars making strategic acquisitions building up our non-core businesses, mainly the institutional side as we tried to diversify the firm. We are now looking to sell some of those non-core assets. But, we are not in a rush and are looking to get the highest valuations for these assets.
We are considering closing or selling smaller regulated entities that require large sums of capital requirements, but that offer increasingly low return on capital. The latter move allows us to free up significant amounts of cash that is currently trapped. We believe that in the near term we can pay down a majority of the loan. That’s our goal.
5. What happens after 90 days according to your agreement with Leucadia?
The agreement says we need to pay back $50 million of the loan along with $10 million in fees in 90 days. If we don’t pay that $60 million, we will be assessed an additional $30 million in fees when the loan is due in 2017. So we are going to pay our $60 million and hopefully more in 90 days and then go from there. To be clear, the financing does not force us to do anything at 90 days.
6. Will you be selling FXCM?
I absolutely do not plan on selling FXCM. Like I said, we will be selling non-core assets but no, I don’t plan on selling FXCM. That is also why we implemented the shareholder rights plan to prevent a hostile takeover. FXCM has been independent for over 15 years and we intend to stay that way.