This day in history: The calm before the storm – January 13-15, 2015

The couple of days before January 15, 2015, which came to be known as “Black Thursday” for a reason, were marked by the enthusiasm typical for the start of every new year – trading companies reporting operating metrics, arranging partnership deals and adding new products to their offering.

FXCM’s share price was hovering around $17, whereas Alpari UK was arranging a partnership with Jazz FM… To some people back then, a black swan was simply a character from Tchaikovsky’s “Swan Lake” and any other mention would have been interpreted as mauvais ton.

The concept of “generous leverage” was different BEFORE. Under the United States National Futures Association (NFA) rules, the maximum leverage on currency pairs with the Swiss franc, Swedish krona, and Norwegian krone, had been set to 50:1 (margin of 2%). The NFA approach was back then considered as rather conservative. That, of course, changed after the SNB move, with the US regulator introducing stricter requirements for leverage. Effective January 22, 2015, the minimum margin requirement for the franc was raised to 5%, and to 3% for the krona and krone.

The generosity regarding leverage seems to be coming back again these days amid retail FX brokers. There are companies that claim to extend “infinite leverage”. But companies are not to be judged harshly for their strategy if certain regulators have not imposed any such restrictions whatsoever.

German regulator BaFIN’s plans to change CFD trading regulations raise eyebrows, for that matter. The watchdog seeks to oblige brokers to provide insurance against negative balances to their clients, which seems to be the right thing to do given the losses incurred due to January 15 events.

A number of companies, including ill-fated Alpari UK (or its administrators, to be more precise), have gone after traders who have lost money, demanding that they repay the sums owed.

So, what is wrong with the fact that the German regulator wants to protect its investors? Obviously, the trivial warnings and disclaimers about CFDs carrying risks of losses did not provide the desired effect. The problem is that BaFIN does not set any leverage limits. FinanceFeeds considers that this plan will indirectly push CFD firms offering service to German clients to operate a B-book execution model.

The ascent of B-book brokers was also noted by FXCM’s CEO Drew Niv in an interview with FinanceFeeds.

“The Swiss National Bank event has helped the industry take more risk management, which is a good thing, but instead, the wrong lesson was learned. Many unregulated B-book companies in obscure jurisdictions actually made a lot of money from this”, said Mr Niv.

Was there a real storm for FXCM? That is not the question to ask here. The question is how FXCM weathered the storm. Mr Niv told FinanceFeeds :

“If you look at FXCM today, it is effectively the same company as prior to January 15 2015. Most of our customers stayed, almost all of the staff stayed. We did sell some non-core assets and for a few months we had some losses, however we kept the market share in tact. What many people don’t realize is that we effectively plugged the capital shortfall with Leucadia’s loan.”