Breaking: IG Group Facing Losses up to £30 Million, Tip of Industry CHF Volatility Losses?

The first brokerage to publicly announce unforeseen losses from the extreme volatility event after this morning's Swiss franc debacle induced

Iggroup_logoAccording to a regulatory filing, the IG Group (LON:IGG) is facing up to £30 million in losses after this morning, the Swiss National Bank having caused excessive volatility on the foreign exchange market.

“The precise level of the impact will be partially dependent on the Company’s ability to recover client debts, but in total it will not exceed, from market and credit exposure,” the company said in a statement.

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The extraordinary market exposure occurred for the UK listed company because its clients’ orders were executed at more beneficial levels than the IG Group was able to get from its liquidity providers during the time of extreme market volatility.

The company will be presenting its results for the first six months of fiscal 2015 on the 20th of January, 2015, when it expects to provide additional details about the impact of the SNB action on the company’s business.

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Tip of the Iceberg?

Conventional wisdom has been that market maker brokers made out like bandits following the plunge in the EUR/CHF, as retail customer sentiment tools showed some firm’s clients at a 90/10 long to short ratio. Nonetheless, the immediate aftermath of the Swiss franc move has shown that nearly every broker is headed for a longer term mess regardless of whether they operate as a market maker or agency desk.

Feedback from brokers relates that a reconciliation nightmare seems to be in the works. As related by IG, brokers who executed trades for clients based on pricing of trades with their counterparties have encountered hedged trades being cancelled or repriced by their liquidity providers. Earlier today, Saxo Bank announced to its clients that executions of trades aren’t final and may be changed following confirmation of pricing with their liquidity providers.

In effect, what has appeared to have taken place is a massive ‘requote’ in the market. Mostly known for taking place between retail brokers and their customers, the table has been turned with brokers receiving word from banks that some of their trades with them have been cancelled. A letter to clients from one of the largest primary bank reviewed by Forex Magnates, stated that “significant issues” took place during the price drop and actual executions may not match that which was reported by their electronic systems. The result is that brokers who had filled customers, may still be on the hook for those trades with their counterparties after seeing trades with banks repriced due to initial rates ‘being out of the market’.

Due to the high percentage of clients being short the Swiss franc ahead of its rapid ascent, even among brokers who focus on market-making, many of them had hedged portions of their customer positions ahead of today’s move. As such, these CHF short positions are deep in the red for many brokers, and as seen by IG, may not be fully mitigated by profits due to customer losses.

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