Global Brokers NZ goes bust after Swiss move
A New Zealand currency brokerage has gone bust as a result of the Swiss central bank's dramatic policy reversal overnight.
Global Brokers NZ, trading as Excel Markets, has placed a notice on its website saying it had sustained a total loss of capital and no longer met regulatory capital requirements.
The brokerage said the huge moves in the Swiss franc had led to losses for clients that exceeded their account equity.
"When a client cannot cover their losses it is passed onto us," it said.
Clients with positive balances in their accounts were safe and open to withdrawals, it said.
Reuters reported overnight that the Swiss National Bank shocked financial markets by scrapping a three-year-old cap on the franc, sending the currency soaring against the euro.
On social media, the move was dubbed "Francogeddon".
The Financial Markets Authority said it was seeking a status update from Global Brokers "and we will be seeking assurances that the client funds have been protected and segregated as they have noted in their statement today."
Global Brokers was an authorised securities dealer but was in the process of applying for a derivatives issuer licence under the Financial Markets Conduct Act which came into force on December 1.
Global Markets is owned by a number of companies registered in the British Virgin Islands tax haven.
Companies Office records show its managing director David Johnson is resident in Ireland.
In an emailed statement to news site Forex Magnates, he said: "We are devastated by the loss of Excel and our funds, it is a project we have put a lot of work into and customer satisfaction was very high. We have sustained a total loss of all our funds on margin at our [liquidity providers]. The silver lining here is that client funds are unaffected, as it should always be."
Its New Zealand compliance director Roger Bell could not be reached for comment.
Greg Boland, director of financial markets for New Zealand brokerage OM Financial, said Excel Markets appeared to be based in Ireland, "which begs the question of why they were operating out of New Zealand."
"The main issue is why haven't they got enough capital and did they hedge their position or not?"
Howard Wilcox of Auckland brokerage KVB Kunlun said the Swiss move was "a huge event" unprecedented in the last 20 years.
"The only thing comparable was when [US] President [Ronald] Reagan was shot."
More brokerages were likely to announce adverse positions in the next few days, he said.
While New Zealand clients tended not to trade Swiss francs, "it was a very interesting night. I wouldn't want too many of those."
New York Stock Exchange listed currency brokerage FXCM yesterday said its clients owed US$225 million (NZ$287m) on their accounts "due to unprecedented volatility in EUR/CHF pair after the Swiss National Bank announcement this morning."
"As a result of these debit balances, the company may be in breach of some regulatory capital requirements."
London-based broker IG Markets told the London Stock Exchange it had suffered a "negative financial impact" from the Swiss move.
"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 £30 million, from market and credit exposure."
National Australia Bank head of research for UK and Europe Nick Parsons told Bloomberg he would be "astonished if we did not see more casualties."
"This was a 180-degree about-turn by the SNB. People feel hurt and betrayed."
The statement from Excel Markets said it was experiencing hundreds of withdrawal requests.
"News of the impact of this event on companies and traders is just beginning to come to light. As directors and shareholders we would like to offer our sincerest apologies for this devastating turn of events, and to thank you for being such a supportive group.
"We ask that you place withdrawal requests for your account balance at your earliest convenience and allow for minor delays as our team begins to experience higher than usual service volumes."
HOW IT WORKS
Many currency brokerages operate on a model known as "straight through processing".
This means they take a client's order and, after taking a margin, pass it straight to a liquidity provider, usually a bank.
If prices move against a client, the client's position is automatically closed off at the next available price and the loss billed to their account.
However, the huge moves in the Swiss franc meant the next available price could cause losses bigger than the client's available funds.
In those cases the brokerage would still have to settle the trade with the liquidity provider immediately.
It is thought those costs wiped out Excel Markets available capital and caused it to go bust.