“Our customers had large losses” – FXCM describes the RUB and JPY events before the “flash crash”
FXCM’s defense is seeking to prove that the RUB and JPY events from December 2014 did not put the broker on notice about the losses it would incur due to the SNB events from January 2015.
“Hi Sarah. How was your vacation? Essentially FXCM had large hedging losses from affiliate retail customer trades”, says Joshua Rosenfeld, FXCM’s Managing Director of Finance and Risk, in an email to Sarah A. Walsh from the National Futures Association (NFA), as he tries to explain what happened to the company’s financials in late December 2014.
The rapid price fluctuations of the RUB and the JPY back then and their effect on FXCM’s financial status are now in the focus of the arguments in a lawsuit captioned International Union of Operating Engineers Local No. 478 Pension Fund v. FXCM Inc. et al (1:15-cv-03599). The plaintiffs allege that FXCM Inc, now known as Global Brokerage Inc (NASDAQ:GLBR), and Drew Niv used the “Black Swan” label as a cover-up of fraudulent misconduct.
According to the plaintiffs, the events from December 2014, preceding the January 2015 de-pegging of the CHF to EUR, should have served as warning signs for FXCM and Mr Niv as to the negative effects for the business from a potential Swiss franc spike. FXCM’s defense is trying to prove the opposite.
In his latest filings with the New York Southern District Court on November 17, 2017, Israel Dahan, representing FXCM and Drew Niv, attaches copies of emails exchanged between Joshua Rosenfeld and NFA officials with regard to the financial situation of the broker in December 2014.
Below are excerpts of this correspondence:
- December 16, 2014:
“Hi Joshua,
My name is Erin Walls and I’m reviewing FXCM’s daily filings…
FXCM’s excess forex assets decreased by ~24% from 12/12/14 to 12/15/14. As such it is NFA policy to reach out to determine the cause for the decrease.”
- December 17, 2014:
“Hi Erin,
There has been a lot of volatility in the JPY and RUB which has caused large hedging losses. On 12/15/2014 we incurred $30m of hedging losses. Last night we had a $25m call from Citibank which means we had similar hedging losses on 12/16/2014. On the customer side our customers had large losses which makes up for part of this but we also centralize trading of our affiliates. When this happens we lose more cash to the banks than our customers lose to us and we have large receivables from our affiliates. This would mean that if we had no volatility on 12/16 we would have received payment from our affiliates and our cash would be up to levels similar to day before the volatility. Since there was volatility on 12/16 we have this cash flow lag once again and cash is similar to the previous day. Our Japanese affiliate alone owed us over $20m for 12/16 losses and it has already been collected. We maintain excess funds in the US because it is not unusual for this to happen.
Joshua”
- December 23, 2014:
From: Sarah A. Walsh (NFA)
Subject (11/30 1-FR Filing)
“I was doing a cursory review of the financial statement that came in today and saw that FXCM’s excess net capital dropped by almost 50% (from $26 million to $14 million roughly). Can you please provide a response to what the drop was from? From doing a review, it looks like excess cash dropped about $30 million.”
- December 23, 2014:
Re: 11/30 1-FR Filing
“Essentially FXCM had large hedging losses from affiliate retail customer trades. This created a large receivable from affiliates which dropped our capital and excess cash. If you look at box 1550 you can see that the receivable from affiliates is just over $23.5 million. On the next business day capital was up to $20.3 million and the next day was back to its prior level. Collecting these intercompany receivables increased cash for most of the $30m drop.
Joshua”
According to the plaintiffs, these experiences serve to rebut defendants’ theory that only an unforeseeable once-in-a-lifetime or “Black Swan” event would significantly threaten FXCM-U.S.’s regulatory capital compliance. While the broker may have “survived” the Yen and Ruble market events, it did suffer a significant capital reduction.
The defendants, however, argue that “FXCM and its agency model and trading safeguards successfully navigated through these two separate major market events, and FXCM remained well capitalized”. Given the company’s performance during these market events, according to them, Mr Niv had every reason to believe it could withstand another future major market event.
The defendants are now asking for an oral argument on their motion to dismiss the plaintiffs’ complaint.
