Banking, finance, and taxes
What the Franc's Volatility Means for FXCM
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In the wake of the Swiss central bank removing the cap of the franc against the euro, the Swiss market saw nearly a 10% sell-off almost immediately. This skyrocketed the value of the franc against the euro. One of the big losers from this move by the Swiss central bank was FXCM Inc. (NYSE: FXCM). After the peg of 1.20 was removed, the Swiss franc went from 1.20 euro to almost parity on the news. Loans that were financed across Europe using the franc immediately became a loss for the lenders. Forex trading on the day ultimately yielded a stronger franc as well.
FXCM is a global online provider of foreign exchange (forex) trading and related services to both retail and institutional investors. As a result of the unexpected and unseen volatility of the franc against the euro, the trader noted that clients experienced significant losses and generated negative equity balanced owed to FXCM of roughly $225 million.
Because the company has incurred these debt balances, it may be in breach of some regulatory capital requirements. FXCM is actively discussing alternatives to return its capital to levels prior to this volatility.
Credit Suisse weighed in on the matter, downgrading FXCM to an Underperform rating from Outperform and lowered its price target to $4 from $18. The brokerage firm considers its ratings change late and it did not anticipate the magnitude of the loss. The stock is expected to approach a tangible book value of $3.15 absent of a capital raise.
Citigroup also downgraded FXCM to Neutral from Sell with a price target of $5 from $17.
Other analyst calls have not been seen yet, but they almost certainly will be forthcoming very soon. Shares of FXCM were down a sharp 88% or so on massive volume at $1.20 in premarket trading on Friday — and the price was seen down at $1.15 after closing at $14.87 on Thursday.
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The stock had a consensus analyst price target of $17.95 before this news broke, and a 52-week trading range of $12.05 to $17.97.
A drop of this magnitude brings up serious solvency issues. It also brings up reminders of what happened to some of the larger firms ahead of and during the Great Recession — firms that are no longer around.
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