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Screenshot of a breaking news alert e-mail from Q2 2017
In its press release describing its deal with Leucadia, FXCM Inc (NYSE:FXCM) made it very clear that it plans to ‘go after’ clients which had lost more than their money on deposit in Swiss Franc (or other) trades gone bad, as the Swiss Franc spiked in value 20% almost instantaneously last Thursday.
These aggregate negative client balances, totaling about $225 million at FXCM, are what ultimately forced FXCM to find a financial lifeline in the guise of a $300 million loan from Leucadia National Corp (NYSE:LUK).
In the press release, FXCM states that it will make repayments of the loan each month to Leucadia “from proceeds received during the immediately preceding calendar month from accounts receivable related to the customer debit balances.”
But do those clients have a right to refuse to repay FXCM these negative balances?
In its latest annual Form 10-K filing with the SEC, FXCM states quite clearly that:
our policy is generally not to pursue claims for negative equity against our customers.
(See FXCM’s Form 10-K, page 11)
Clients with negative equity balances, if approached by FXCM, could simply state that they relied on FXCM’s policy and that they therefore reasonably expected that their losses could never exceed the amount of money they had on deposit.
We understand that most retail forex brokers (including for example Gain Capital and its Forex.com unit) are just forgiving the negative client balances of clients who lost more than their deposit balance due to the Swiss Franc spike.
The main reason for doing so is a simple business decision.
If the balances aren’t forgiven, then the trader goes away and likely opens up a new account at a different broker, while the first broker really has little chance of ever getting its money back. But if the (first) broker forgives the balance, then the trader is much more likely to stay, deposit new money, and trade again.