LeapRate's Daily Forex Industry Newsletter
Join now to receive first access to our EXCLUSIVE reports and updates.
Screenshot of a breaking news alert e-mail from Q2 2017
LeapRate Exclusive… LeapRate has learned that some retail forex brokers are now going about the (very difficult) process of trying to get their clients to repay negative client balances.
A lot of retail forex traders (which were short the Swiss Franc) lost on paper more than their money on deposit. A lot more. For example, a trader which had $1,000 on deposit with a broker and used it to back a 100x leverage trade long EURCHF would have lost about $20,000 as the EURCHF rate dropped by 20% virtually instantaneously.
But the broker only had $1,000 of the trader’s money on deposit. That would leave another $19,000 which the trader technically owes to the broker.
These ‘negative client balances’ were the cause of problems at brokers such as FXCM and Alpari UK. The brokers had to pay those traders which were on the right side of the market and made money, but could not collect from the other traders on the wrong side of the market who lost money. FXCM’s negative client balances reached $225 million by the end of the day Thursday, leading to the bailout of the company via a $300 million loan from Leucadia.
Some brokers have a forgiveness of negative client balances policy. They tell clients that they can never lose more than what they have on deposit.
But not others.
LeapRate has learned that Gain Capital Holdings Inc (NYSE:GCAP) and its Forex.com retail unit have begin sending out emails (see example below) to clients with negative equity balances, informing them of their obligation to make good on what they owe.
FXCM Inc (NYSE:FXCM) indicated in its detailing of the Leucadia loan that the agreement with Leucadia ‘requires monthly payments of the term loan from proceeds received… from accounts receivable related to the customer debit balances’.
Clearly, FXCM is also planning on going after those clients who, on paper, owe them money.
We believe that it will be very difficult for any broker to get their (former?) clients to make good on these negative client balances. Certainly there will be some collections. But we doubt that a meaningful percentage of the negative balances will be recovered. And it will be a long and potentially expensive process for brokers to go after the many smaller clients who, technically, owe them money.
We believe that the brokers will be more interested in getting those traders to just deposit more money and begin trading again, eventually agreeing to forgive the owing balances.
This also means that a lot of traders will be changing brokers. If you owe your broker money and don’t want to pay, you’ll simply open an account at a rival broker.
The following is an email received by a Gain Capital Forex.com client:
Thank you for your email.
I did answer your question in the previous email reply that I sent to you. Due to the unexpected announcement by the Swiss National Bank on the 15th, there was an extreme level of volatility and low liquidity that was experienced throughout the forex industry. This is an inherent risk in trading in the forex market as major economic announcements can cause extreme volatility leading to huge losses. All clients are fully responsible for settling any deficit balances in your trading account. We do not have a no negative account balance policy so you are fully responsible for the deficit in your account; therefore we will not credit your account.
If you have any other questions please email us again or call 1-877-FOREXGO.
Client Services Team