The Cyprus EU bailout – will it affect FX brokerages?

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Saxo Bank co-CEO's comments question whether the 10% confiscation of client funds at Cyprus banks will also apply to Cyprus FX brokerages.

Cyprus flagBefore we start (or contribute to an existing) panic among clients of Cyprus-based FX brokerages, we would like to state at the outset that we have been told directly by senior management at several leading Cyprus-based FX brokerages, that all client money at Cyprus FX firms is completely safe, and there will be no haircuts or confiscation whatsoever in client funds.

That being said, Saxo Bank founder and co-CEO Lars Seier Christensen posted a scathing piece on Saxo Bank's TradingFloor.com research and commentary website (also available in LeapRate's FX Research section) blasting the general confiscation idea, which also questioned: "What is the exact impact on any client deposits they might be holding in Cyprus [FX brokerages]? I would assume that most funds are held abroad with major FX counterparts, not Cyprus banks, but clarification of this aspect would be useful."

A quick recap -- the EU announced a €10 billion financial rescue package for Cyprus over the weekend. The plan includes a "share-the-pain" clause whereby depositors in Cyprus banks will see a portion of their savings confiscated, to help pay for the bailout. Depositors with less than €100,000 in their accounts will have to pay a one-time tax of 6.75%, and those with greater sums will lose 9.9%. Depositors will be compensated with the equivalent amount in shares in their banks. The levy will not formally take effect until Tuesday, following a public holiday, but action has been taken to control electronic money transfers over the weekend. Co-operative banks, the only ones open in Cyprus on Saturday, closed after people started queuing to withdraw their money. At one bank in Limassol a frustrated man parked his bulldozer outside and threatened to break in.

The "confiscation" idea has been hit with tremendous criticism from bankers and economists globally, as well as officials in other "weak" EU countries, as this move will likely lead to a general exodus of monies from banks in those countries, as people worry that this could happen again elsewhere. The countries most if the need of investor confidence and inflows of capital, including Cyprus, will see the exact opposite. This is "the law of unintended consequences" at its very best (or worst, rather).

Back to the FX world. After having contacted senior management at several leading Cyprus FX brokerages, we got the exact same answer -- client money is SAFE, SAFE, SAFE. It is not expected that the confiscation will apply to them. And in any case, even if it is applied to them, most of the client money at leading Cyprus FX firms is held in Tier-1 banks outside of Cyprus. And, we were assured, in the (very unlikely) event client money was indeed somehow confiscated, the brokerages themselves would make their clients whole. (We at LeapRate of course cannot guarantee that this would actually happen at every Cyprus FX brokerage).

Nevertheless, this EU action is not exactly helpful to the Cyprus FX industry -- an industry which has grown, created a lot of employment in Cyprus, and been a nice contributor to Cyprus' overall economy. If the EU action was meant to help get Cyprus back on its feet, well -- they've likely done the opposite, and set back investor confidence in Cyprus financial institutions of all kinds.

One last note -- the "EU bailout law" is not yet approved by the Cyprus parliament. It was supposed to have been voted upon today (Sunday), but as of this writing it has been postponed to tomorrow (Monday). There is still no guarantee that it will actually pass into law and become effective.

Please let us know your thoughts and comments below. As Saxo Bank's co-CEO wrote, this is a MAJOR game changer, and "full-blown socialism".

For the original article by Saxo Bank founder and co-CEO Lars Seier Christensen see the LeapRate Home Page or FX Research section (under the Saxo Bank tab), or click here.

For more on the global Forex industry see the LeapRate-Dow Jones Forex Industry Report.

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Guest Wednesday, 16 April 2014

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