Foreign Exchange Brokers Are Being Shut Down By Losses In The Swiss Franc's Surge

Casualties from Thursday’s astonishing boom in the value of the Swiss Franc are rolling in.

FX brokers that had relied on the stability of the Swiss Franc, which until Wednesday was pegged to the euro were taken by surprise when the Swiss National Bank abolished its controls, and millions of dollars were lost at a host of firms around the world.

UK-based FX broker Alpari just announced that is has entered insolvency. Here’s what they said:

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. 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. This has forced Alpari (UK) Limited to confirm today, 16/01/15, that it has entered into insolvency.

That follows New Zealand’s Excel Markets, which made the same statement earlier, according to the Financial Times.

Brokers can go out of business on big moves like this because they give their clients access to leverage. For example, an account holder might have $US1,000 with the broker, but hold positions worth $US10,000 in currency markets. That doesn’t matter so long as the holder’s losses are covered by the initial amount. But on Wednesday, for at least two brokers, that wasn’t the case for a lot of those clients.

New York-based FXCM, one of the world’s biggest foreign exchange brokers, says that it may be in breach of rules on capital requirements and that it is owed $US225 million by clients who are now in negative equity.

IG Group, a publicly listed UK-based broker said yesterday that its losses would not exceed £30 million ($US45.7 million).

This isn’t likely to be the last of the fallout from the colossal move, which was almost unheard of among the most widely traded currencies of advanced economies.

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.