Swiss shock: Leucadia bails out FXCM after losses

Depression, Suicide

The brokerage was brought to its knees by the Swiss National Bank's surprise move on the franc Thursday.

Retail foreign exchange broker FXCM got a $300 million bailout on Friday after taking huge losses on the Swiss National Bank's (SNB) shock decision to drop its three-year-old peg of 1.20 Swiss francs per euro.

Leucadia National invested $300 million cash in FXCM in exchange for $250 million in two-year senior secured notes with a 10% coupon. If FXCM is sold, Leucadia will get 75 percent of the proceeds.

FXCM said Thursday evening that clients owed it $225 million and that it may be in breach of some capital requirements. The stock fell 90 percent in premarket trading Friday before being halted.

As recently as last January, the European Central Bank ranked FXCM as the world's third-largest retail foreign exchange broker.

The rescue came just hours after foreign exchange broker Alpari UK entered insolvency following the Swiss National Bank's decision.

Citigroup has also lost $150 million to $200 million on forex trading because of the Swiss moves, a source told CNBC, demonstrating the magnitude of impacts on the markets.

Rich Repetto, Sandler O'Neill principal, told CNBC's " Squawk on the Street " Friday that this "may be the event of the year when you talk about market movements."

Repetto also said that leverage numbers need to be reexamined by regulators to help prevent these types of reactions in the future.

The FXCM saga intensified just hours after Alpari's collapse.

"The recent move on the Swiss franc caused by the Swiss National Bank's unexpected policy reversal of capping the Swiss franc against the euro has resulted in exceptional volatility and extreme lack of liquidity," Alpari UK said in a statement.

"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."

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The company said that, as a result, it had entered into insolvency, adding that retail client funds would continue to be segregated in accordance with FCA rules.

This came after New Zealand brokerage Excel Markets also announced that it was unable to resume business following the SNB's move.

"Both our primary and backup liquidity providers became unresponsive or illiquid for hours after the event," the brokerage said in a statement.

"The majority of clients in a franc position were on the losing side and sustained losses amounting to far greater than their account equity. When a client cannot cover their losses it is passed onto us."

 

The SNB stunned markets on Thursday, when it scrapped its three-year-old peg of 1.20 Swiss francs per euro . Shortly after the central bank's announcement, the Swiss franc soared by around 30 percent in value against the euro, and by 25 percent against the dollar.

Currency trading platform Forex.com suspended trading in Swiss francs after the SNB's announcement . On Friday, the company said it hoped to resume trading in the currency soon.

A number of spread betters, including Forex.com, CMC Markets and ETX Capital, issued statements saying that Thursday's extreme currency movements had not materially affected their companies' financial positions.

However Adam Myers, European head of FX research at Credit Agricole, said that some market participants appeared to have been aware that the SNB's decision was coming before the official announcement.

"It definitely looks like to us," he said on Friday. "There was a movement in the market well ahead of the headlines (from the SNB)."

He also said there was a "huge flow" of Swiss francs -- around 34.2 billion -- into Switzerland during December, according to the SNB, which is around 10 times the monthly average.

"You wonder why the Swiss had to break the peg - they were brought to bear by the enormous strain of money flowing into the country during December."

- By CNBC's Katrina Bishop and David Faber. Reuters contributed to this report.

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