Once considered an industry leader in forex and Contract for Difference (CFD) trading, a tumultuous two-plus years have some wondering if FXCM can survive and what form its survival will take.
The difficulties began on January 15, 2015, with what the forex market refers to as the Swiss National Bank (SNB) event.
“On January 15, 2015, the Swiss National Bank (SNB) caused a flash crash that led to historic dysfunction never seen before in the FX markets when it announced that it was completely (not gradually) removing the 1.2000 self-imposed floor on the EUR/CHF exchange rate.” A press release from the company stated. “The SNB’s shocking announcement was made without any prior warning or notice to the marketplace. As the market perceived the EUR/CHF rate to be real, the abrupt change triggered chaos and a complete FX market breakdown.”
“At the time of the SNB announcement over 3,000 of our clients held slightly over $1 billion in open positions on EUR/CHF.” FXCM’s 2015 annual report states. “Those same clients held approximately $80.0 million of collateral in their accounts. This SNB action wiped out the account equity of those clients as well as generated debit balances owed to us of $275.1 million.”
Only a lifeline from Leucadia National, in the form of a $300 million credit line, kept the company from a total collapse.
To add insult to financial injury, the Commodities Futures Trading Commission (CFTC) filed a civil action finding FXCM in August 2016 was undercapitalized in response to the SNB event.
A defensive FXCM issued a statement saying it was “very disappointed by the CFTC’s decision to file this complaint and attempt to punish FXCM who, like other market participants, was a victim of the SNB Event.”
Meanwhile, Leucadia’s lifeline was no blank check; two FXCM board members were replaced by Leucadia executives on Fastmatch, an electronic communications provider of forex, where FXCM is a “passive minority” shareholder.
In September 2016, Leucadia announced the completion of a long term partnership agreement with FXCM: “With Leucadia now holding a membership interest in FXCM’s operating entity, FXCM Group, LLC.”
Leucadia now controls three of the six members of FXCM’s board- per FXCM’s latest 10Q filings.
A story on Bloomberg at the time the loan was made noted that Leucadia “can force a sale of the currency broker and keep most of the proceeds for itself under terms” of the loan.
Since the SNB event, FXCM has been selling off assets all over the world.
It sold its Asia unit to Rakutan Securities for $36 million in March 2015, its Faros Trading Unit to Jefferies (which is owned by Leucadia) in April 2015, its, FXCM Securities to AS ExpoBank in December 2015, and DailyFX to IG Group for $40 million in December 2016.
Then, the other financial shoe dropped; FXCM was hit with coordinated civil fines from the CFTC and the National Futures Association (NFA) for engaging “in false and misleading solicitations of FXCM’s retail foreign exchange (forex) customers by concealing its relationship with its most important market maker and by misrepresenting that its ‘No Dealing Desk’ platform had no conflicts of interest with its customers.”
The financial penalty- $7 million- was much less than the damage to the company’s reputation, being branded as taking advantage of their customers.
The repercussions were swift with FXCM withdrawing its membership in both the NFA and CFTC organizations and selling its US unit to Gain Capital the next day.
With that, the company no longer had any operations in the largest financial market: The United States of America.
The company’s fall has been dramatic; it closed trading at $126.30 on January 12, 2015- the last trading day before the SNB event- traded at $6.97 on the day before the most recent CFTC/NFA announcement and currently trades at a miniscule $2.95, having shed more than 95% of its market cap.
The dramatic fall has caught the eye of at least one attorney; Bronstein, Gewirtz & Grossman, announced on February 10, 2017, it was filing a class action lawsuit against FXCM on behalf of shareholders who purchased shares between March 15, 2012 and February 6, 2017.
Besides the standard press releases, the company has remained tight-lipped on its future; an email to the public affairs officer of FXCM from The Industry Spread asking about its financial health was left unreturned.
The cupboard is not totally bare for FXCM; per its most recent 10Q’s filed in compliance with rules for publicly traded companies, here are its remaining units: FXCM Global Services LLC, Forex Capital Markets, Forex Capital Markets Limited, FXCM Australia Pty Limited, ODL Group Limited, FXCM UK Merger Limited, Lucid Markets Trading Limited, Lucid Markets LLP, and V3 Markets, LLC.
Here’s a brief outline of the remaining assets.
- FXCM Global Services is based in Tokyo and provides customized liquidity solutions through our wide range of products and services to institutional clients, such as banks, broker dealers, proprietary trading houses, and high frequency traders (HFTs)
- V3 Markets was founded in 2013, Chicago, Illinois, it provides electronic services and Mark Palchak serves as its Chief Executive Officer (CEO), ,
- ODL Group Limited was founded in 1974 and is based in New Zealand and provides insurance brokerage services,
- Forex Capital Markets is based in London and provides online brokerage services for: Forex trading, CFDs, and spread betting.
- FXCM UK Merger Ltd. operates as a subsidiary of FXCM Newco, LLC, itself a subsidiary of FXCM Holdings LLC, which provides FXCM’s core business online foreign exchange trading,
- Forex Capital Markets Limited has offices in Paris, Italy, and Athens, Greece, and provides
- Lucid Markets, LLP, is based in London and operates as a non-bank electronic market making and trading company in the institutional foreign exchange market. FXCM acquired Lucid Markets, LLP in 2012.
- Lucid Marketing Markets Trading Limited was formed in 2011 and is based in London and operates as a non-bank electronic market making and trading company in the institutional foreign exchange market with Dierk Martin Reuter its founder and director,
But several of these are about to be sold per the same filing: “The Company remains committed to a plan to sell Lucid, V3 and its equity interest in FastMatch and continues to actively market these businesses.”
FXCM owns 35.1% of Fastmatch, according to the filing.
If all sales are completed, this would leave the company with operations in Britain, Australia, along with its core forex business.
But even these remain in danger- according to Finance Magnates- which believes other regulators will follow CFTC’s lead.
“The implications of years of the deceptive marketing of FXCM’s ‘no-dealing desk’ platform could ring alarm bells for regulators worldwide. The first regulatory jurisdiction in which the company is likely to come under scrutiny is the UK, where the Financial Conduct Authority is the chief regulator of FXCM,” the Finance Magnates analysis mused.
Along with the FCA staring down at its British operations, the Australian Security and Investment Corporation (ASIC) has regulatory oversight over its Australian operation and presumably they may follow suit of its American and British counterparts.
Potential buyers will take note of all the regulatory scrutiny and factor it into any purchase price.
History is full of companies who once faced the kind of turbulence now faced by FXCM; Apple and Motorola also once looked into the financial abyss and both made miraculous recoveries.
FXCM is destined to be studied in post-graduate level business classes; only time will tell if it is a cautionary tale or a story of overcoming.