Financial firms stung by last week's surge in the Swiss franc are changing client rules and trading practices to weather future currency swings.
FXCM Inc., the New York-based retail broker, said Wednesday it's increasing margin requirements for clients who trade currencies and gold after customers' losses forced it to seek a US$300 million lifeline. CME Group Inc., owner of the Chicago Mercantile Exchange, is altering how it handles volatility in emergencies after it was buffeted by trading halts last week.
Some of the world's largest banks incurred losses and struggled to process orders after the Swiss National Bank scrapped a three-year cap on the franc versus the euro on Jan. 15, fueling a surge of as much as 41 percent in the nation's currency. The turmoil shows regulators need to consider boosting oversight of retail trading platforms such as FXCM, a member of the U.S. Commodity Futures Trading Commission (CFTC) said.
“I am concerned that lower standards are putting this industry in a precarious position and placing retail foreign-exchange investors unnecessarily at risk,” said Commissioner Sharon Bowen, a Democrat who joined the CFTC last year. That market “is the least-regulated part of the derivatives industry,” she said.
The National Futures Association (NFA), the U.S. derivatives industry's self-funded market overseer, temporarily boosted the amount of money traders must put down to back currency transactions. The more stringent requirements apply to the Swiss franc, Swedish krona, and Norwegian krone, the group said in a statement. The changes apply to retail trading.
Protecting Clients
FXCM, which was bailed out by Leucadia National Corp., said its own new global requirements would take effect Wednesday and are “consistent with the firm's most conservative margin requirements currently in place” for U.S. customers. The changes will help guard against swings tied to the European Central Bank's rate decision Thursday and the upcoming Greek elections, the firm said, without giving details on the rules.
“There is a high level of uncertainty in the currency markets that could destabilize markets throughout 2015,” FXCM said in a statement. “FXCM's decision to increase margin requirements is in order to protect clients during extreme market volatility.”
A spokeswoman for FXCM didn't respond to messages seeking comment on the policy changes.
Leucadia, owner of investment bank Jefferies Group LLC, extended FXCM a two-year, $300 million senior secured term loan with an initial coupon of 10 percent, according to a Jan. 16 statement. FXCM climbed 46 percent to $2.33 on Wednesday.
CME, which caters to professional traders and not retail customers like FXCM's, said in a statement that its new rules will make it easier to change limits on price swings during unusual circumstances. The exchange was forced to alter volatility curbs on an ad-hoc basis Jan. 15 as the Swiss currency's jump prompted three trading halts for CME futures contracts linked to the franc.
CME's global command center—where trading at the exchange is monitored in real time—can now modify the price limits or remove them entirely during an emergency, according to the statement. It can also decide whether trading of a given futures product should be halted during times of distress.
–With assistance from Jing Cao and Matthew Leising in New York.
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