Possible regulatory effects after the Swiss franc surge

During the past few weeks there have been several indications by the different regulatory authorities regarding future tightening up of the requirements and supervisory activities at European level as well as local authority’s level. For example ESMA has published on 22nd Dec, last year Guidelines on consistency of supervisory practices for financial conglomerates, aiming to clarify and enhance cooperation between national competent authorities on cross-border groups that have been identified as financial conglomerates.

Another clear indication came from FCA on 17th Dec with the publication on their web site focused on the supervisory priorities arising from EMIR. ESMA has already indicated in previous documents related to EMIR that additional requirements are implemented to ensure a higher pairing rate of the reported trades and higher quality of the gathered data.

With such regulatory activities at the background, yesterday, 15th Jan the Swiss National Bank has decided to discontinue the minimum exchange rate of CHF 1.20 per euro and to cease the foreign currency purchases associated with enforcing it. The Swiss National Bank has also decreased the interest rate to negative -0.75%. All this came into force with immediate effect at the time of announcing it by the SNB and without any prior notice or indication of it.

None of the market participants were prepared for this situation and the EURCHF rate declined with about 24% then bounced back to about 15% less than the former cap. The IT infrastructure of some of the banks was not prepared for this rapid surge of the Swiss franc. There have been algos that were not able to quickly adjust to the price move. At least one electronic currency trading system of a bank has temporarily halted transactions, another one has temporarily ceased to provide quotes. All this added up to one of the sharpest price moves in the FX market.

The consequences for the industry participants are disastrous.

The first casualty is the New Zealand based Global Brokers NZ Ltd. According to the official statement published in the web site on 15th Jan: “Global Brokers NZ Ltd. STP’s 100% of order flow and has sustained a total loss of operating capital. GBL can no longer meet regulatory minimum capitalization requirements of N$1,000,000 and will not be able to resume business.” Another part of the statement says: “All open positions must be closed by 5 pm New York time or they will be automatically closed at that time. New positions cannot be opened as of this time.”

This ends the myth that 100% STP brokers (i.e. that operate 100% agency model) are risk free.

The third biggest broker (by retail volumes) is not spared either. Alpari (UK) announced today at 12:00 on their web site “This has resulted in the majority of clients sustaining losses which has exceeded their account equity. Where a client cannot cover this loss, it is passed on to us.  This has forced Alpari (UK) Limited to confirm today, 16/01/15, that it has entered into insolvency.” The full text of the news is available here. It is reported that the clients cannot log into their live accounts now.

The biggest player FXCM (NYSE:FXCM) is also heavily affect as their stocks collapsed and are halted on New York Stock Exchange. FXCM has announced that the total clients’ loss is approximately $225 million negative equity balance. Тhe official announcement is: We are actively discussing alternatives to return our capital to levels prior to today’s events and discussing the matter with our regulators.” Later it was announced that FXCM is receiving $300M bailout from Leucadia National.

The banks are also affected. According to Bloomberg Deutsche Bank has lost approx. $150M. Business Insider reports that Citigroup has lost $150M too, while Barclays has lost tens of millions.

What will happen next from a regulatory point of view?

The current situation would speed up the processes that have already been started at a regulatory level. We expect that ESMA and the local regulatory authorities will impose requirements for tighter supervision and more frequent and detailed reporting.

CySEC (the Cyprus Securities and Exchange Commission) is the first one that is immediately reacting to the situation. CySEC requires the investment firms to report by Tuesday, 20th January, 2015 the full details about the effects from the Swiss franc surge.

Another short-term effect that we expect is the transitional periods for EMIR reporting (that have given some comfort to the companies) to be shortened sooner than expected. The companies in the financial industry will need to ensure that they have established EMIR reporting that is fully compliant. This also applies to the MiFID reporting and capitalization requirements. We expect fines to be imposed to the companies that fail to accurately report their trades. And this process might start very soon.

A long-term outcome might be establishing higher capital requirements for agency brokers as well as higher licensing fees. This can also be extended to all brokers that are currently operating.

The Swiss franc surge opens up the door for quicker and tighter measures by the regulators.