Sudden jump of Swiss Franc Move Hits Banks, Wipes out Brokers

Fallout from Switzerland’s wildly swinging currency ricocheted around the world, hitting global banks with tens of millions of dollars in losses and triggering the collapse of some brokerage firms.
Deutsche Bank AG suffered about $150 million in losses Thursday after the Swiss National Bank abruptly removed the cap on the Swiss franc’s value, sparking a massive rally, according to a person familiar with the matter. Barclays PLC also racked up tens of millions of dollars in losses, although they totaled less than $100 million, another person said.
Brokers around the world are crumbling in the wake of the Swiss National Bank’s shock decision to remove the cap on its currency. WSJ's Tommy Stubbington reports. Photo: AP.
Meanwhile, a major U.S. currency broker warned its equity was wiped out, a U.K. retail broker entered insolvency and a New Zealand foreign-exchange trading house collapsed. Regulators in Europe and Asia scrambled to assess the damage, seeking information from banks and brokerages and trying to ascertain the potential impact on mom-and-pop investors.
The losses were triggered by the Swiss franc’s 30% jump against the euro in the minutes after the SNB scrapped its cap on the nation’s currency relative to the euro. Brokers found themselves unable to trade because of the unexpected volatility and the fact that some big banks stopped quoting rates for francs. Their customers’ huge losses, partly fueled by large quantities of leverage, which allows clients to stake large sums with relatively little cash, quickly eroded the brokerages’ financial cushions, tipping some into insolvency.For Deutsche Bank and Barclays, the losses stemmed at least in part from their traders’ portfolios of options tied to the Swiss franc, according to traders and other banking officials. The value of those options is directly tied to the level of market volatility and the Swiss franc exchange rate. The sudden change in those two factors caused immediate losses for the banks, these people said. While representing large single-day losses, they are unlikely to have a major long-term impact on either bank.
FXCM Inc., the biggest retail foreign-exchange broker in the U.S. and Asia, said in a statement that the unprecedented volatility in the euro against the Swiss franc triggered losses that left it with a negative equity balance of about $225 million and that it was trying to shore up its capital. “As a result of these debit balances, the company may be in breach of some regulatory capital requirements,” the company said.