By any measure, 2015 has already been a blockbuster year in the forex world. While stories in previous years usually dealt with specific crises in foreign lands or the impact of new regulatory controls on the industry, 2015, unfortunately, has been very different.
Central banking policies, notoriously impossible to predict or prepare for, have wreaked havoc on the brokerage landscape. The consequences of stiffer regulations on the trading activities of major banks have resulted in billions of dollars in fines and tarnished the reputations of five of our largest and most respected financial institutions. Amidst this scandalous turmoil, a host of brokers were caught in the crossfire, either by their own doings or by what some have labeled a Ponzi scheme of monstrous proportions. And, as if on cue, Greece defaulted on its debt on the last day of the semester, leaving all to ponder, “What happens next?”
Have all of these major story lines run their course? The press may have moved on, but none of the major stories that hit the stage running in 2015 have lost all of their steam. Here is a brief recap of the big 2015 headline grabbers.
Swiss Franc Debacle
Currency pegs rarely achieve long-term success. When instituted, they may achieve a temporary objective, but eventually they must be unwound, and the impacts at that point are never pretty. The Swiss National Bank (SNB) was the protagonist in this story, while the victims were brokers, their clients, and, perhaps, the Swiss economy at some point in the future. The SNB implemented a “peg” to the Euro some three years back, due to the nasty habit of European investors to stash savings in the more secure Swiss Franc, a safe haven of sorts at the time.
The irrational demand placed on the Swissie caused a massive appreciation that the central bank could not stomach any longer. The European Debt Crisis, now in its seventh year, refused to go away. The fear of a Euro crash fueled further capital flight across the border, forcing the SNB’s balance sheet to balloon. Forex traders, however, were loading up on the Swissie, especially after SNB authorities swore publicly in early January that the 1.20 peg to the Euro would “remain the pillar of our monetary policy.”
Unfortunately, forex traders loaded up on the wrong side of the trade. The SNB reversed course with no warning and lifted the so-called peg. Pandemonium raged. In some forex markets, the “EUR/CHF” pair instantly lost 40% of its value. Stop losses were ineffective. Margin accounts were blown off the map. The financial tsunami that followed meted out enormous losses, by most estimates, in the billions. Bankruptcies occurred across the globe. Amazingly, many brokers escaped the carnage, especially binary option firms.
Recap: Nearly six months have passed, and now the Greek tragedy has ratcheted up another gear. Default and “Grexit” are sending fear and uncertainty through financial markets across the globe. And, you guessed it, investors are once again stashing their savings in safe havens, namely, the Swiss Franc. The SNB has intervened by selling CHFs to keep valuations down, but we know how that game goes. As for the Swiss economy, we were supposed to see excessive inflation due to the bloated balance sheet of the SNB, but inflation has hovered just below zero for the first six months of 2015.
FXCM and Alpari UK Story Lines
The Swiss Franc Debacle brought many of the largest and smallest forex brokers to their knees. Many did not survive the shockwave that swept through, demolishing every sector of the industry, including large insurance mutual funds, along with many highly capitalized hedge funds. The John Hancock Absolute Return Currency Fund, with shares valued at over $1.9 billion, plummeted 8.9% in a single day. The Everest Capital Global Fund had to shut down when $830 million went up in smoke.
Although many brokers had stories to tell, the press focused on two for continuing press coverage. The first one was FXCM, one of the largest, if not the largest, forex broker in the United States, with its shares traded on Wall Street. The second was Alpari UK, a London subsidiary of a much larger global operation. It was spun off and allowed to die, thereby calling upon UK authorities to step forward and protect customers through various investor compensation schemes. FXCM survived nearly $300 million in losses, but only after receiving an emergency loan from Leucadia National Corp. The loan terms are oppressive, but FXCM has sold non-core assets to raise payback capital.
Recap: FXCM is in recovery mode. They recently announced forex volumes of $331 billion for May and that they would be able to pay back Leucadia before the end of this year. Investor confidence was restored, and shares for the firm quickly rose 5%. As for Alpari UK, two separate joint administrators, KPMG and the Financial Services Compensation Scheme (FSCS), have already agreed to pay 55 cents on the dollar for clients that lost their account funds. Some payments have already been made, as of this writing, and the balance will be completed shortly.
The CWM FX Affair
Greek mythology seemed to have a hand in this story, the one about Icarus flying too close to the Sun with waxen wings and then paying for his hubris by falling to his death. The myth became reality when London police raided the swank Heron Tower offices of CWM FX, a highflying brokerage house that burst onto the UK scene in 2014. The firm had gained a quick reputation for boasting high profile sports sponsorships, from boat shows and boxing, to Premier League soccer deals with likes of Chelsea FC, this year’s champion. Despite the raid and website freeze, their ever-present founder, Anthony Gregory Constantinou, swore vehemently that his firm had been wrongly attacked and would soon resume activities. After these entreaties in March, little news has followed.
Recap: The CWM Affair is shrouded in mystery. Very little has seeped into the hands of the press over the past few months. Chelsea FC did immediately drop the sponsorship ties to the firm. If you attempt to access their website, an error message informs you that the webpage is unavailable. In the absence of real facts, conspiracy theorists are having a field day. The question that begs an answer is where did Constantinou get the cash to convince so many large sports franchises to deal with him after no due diligence. He is now publicly being accused of running a £100 million-plus Ponzi scheme with underworld ties to “a massive $16 billion Ponzi scheme, orchestrated by the Mauritius-regulated Belvedere Management Limited”, and a $130 million Cayman Islands Ponzi scheme, going by the name of Brighton SPC. The plot thickens, but is it true?
Major Global Banks and Their Rate Fixing Misdemeanors
Banksters – You may love ‘em, you may hate ‘em, but you cannot do without them, or so they think. These “Too-big-to-fail” con artists have been living on borrowed time since the financial crisis of 2008. Few, if any, have served jail time for their fraudulent activities that drove the world into the Great Recession. If anything, they have reluctantly buckled under to new regulations, but industry observers are appalled that they continue to draw huge bonuses and ply their high-risk gambling antics with reckless abandon.
New laws and the reality of the market have made it difficult to make outrageous profits at the expense of pension funds, insurance companies, and the average investor. The industry is way over crowded, as well. The normal response is to compete harder, but banks have never been good competitors. They instead invent new complex securities to foist upon an ignorant sales base, or they do what’s left – wait for it – they cheat! The evidence is in after a year of investigations on what has been termed the most monumental rate-fixing scandal of our times. Over $10 billion in fines have been levied on the likes of Citicorp, JPMorgan Chase, UBS, London-based Barclays, and Royal Bank of Scotland (RBS).
Recap: By some estimates over $150 billion in fines have been assessed on the banking industry over the past decade. Annual profits in the industry are roughly the same figure, leaving one to believe that these fines are considered just a cost of doing business. The executives and traders never pay them either. They are passed down to shareholders and the public at large in higher costs. These five banks are already negotiating in the background to have these fines lowered, but no one is going to jail. There may be civil lawsuits to follow, and central bankers swear they will divide them. Only time will tell.
We have written several articles on the travails of Plus500, a leading provider of Contracts for Difference (CFD’s) and traded on the London stock exchange, and its harried management team. We will not bore you with the details at this stage, only to say that when regulators speak, brokers should listen and act accordingly. At present, Playtech, the world’s largest online gaming software purveyor, is rapidly buying shares and about to complete its takeover of Plus500. Regulatory approval is needed, as well as a favorable stockholders’ vote on July 16th.
Recap: Odey Asset Management, the largest shareholder to date, is against the deal. They want more money. Imagine that? Revenues for the firm in the second quarter were down, as expected, and they continue to free up accounts, roughly 13,500 at this writing, leaving another 10,000 or so to go. Playtech has already bought 10% of the shares on the open market. They cannot vote these shares, but by buying them, they have increased the percentage of shares that already favor the merger. Time marches on.
Last, but not least, we have Greece and it s failure to live up to payment obligations on another deadline – What else is new? You can imagine opening the Trojan Horse today, not to find an army of Greek soldiers, but a mountain of devalued Greek debt securities. The European Debt Crisis erupted in full bloom in May of 2010, driven primary by the fiscal ineptitude of Greece and its other weak EU member brethren. The so-called crisis is now in its seventh year with no end in sight.
Recap: A public referendum is scheduled for July 5th, where Greek citizens will literally decide if they wish to stay in the Eurozone. They claim to want to stay, no matter the consequences. I guess the Devil you know is better than the Devil you don’t!