LeapRate Exclusive Interview…. It would be an understatement to say that the past 14 months have been topsy turvy for the people who run FXCM Inc (NYSE:FXCM), one of the world’s leading retail forex brokers.
After narrowly avoiding bankruptcy in the Swiss Franc spike of January 15, 2015 which left FXCM with more than $275 million of negative client balances, FXCM was forced to sell off a number of its subsidiaries and businesses around the world including FXCM Japan and FXCM Hong Kong. FXCM’s share price collapse forced the company into a 10:1 reverse split of its shares, only to have its share price spike late last year as rumors swirled that it was going to redo its $300 million loan with Leucadia, which had allowed FXCM to keep operating after the aforementioned Swiss Franc related losses.
However through it all, FXCM seems to keep chugging along. FXCM’s all-important retail FX trading volumes remain above $300 billion per month, still one of the largest in the industry. Despite the asset sales FXCM’s Q4 revenues were above Q3.
To explain it all we are pleased to speak today with FXCM CEO Drew Niv on everything from the company’s results to the Leucadia loan – and of course on how things are done differently now at FXCM, more than a year after the Swiss Franc ‘Black Swan’ event.
LR: Hi Drew, and thanks for joining us today. Your Q4 results and February trading volumes announced last week seem to be fairly strong. Q4 revenues were above Q3, and your retail volumes remain above $300 billion per month. How have you accomplished that, even as FXCM has been selling assets and businesses over the past year?
Drew: FXCM is still one of the leading franchises in the industry and while our investors and shareholders, me being the biggest one, have suffered big losses, the core business remains unaffected. Our value proposition to the customer remains very strong and we have kept on investing and innovating in the retail business. We are exiting non-core operations but have invested large amounts of money in improving our core service which is apparent to our clients as they have been very resilient. Specifically many of our best clients have very few quality A book solutions that can handle their more complicated EA or black box flows. Many of the B book brokers that weathered the SNB storm quite well being on the other side of customer losses cannot handle these flows and they deem toxic.
LR: While you continue to look at selling some businesses, we are sure that you’re looking at growing others. Where do you see the main growth opportunities today at FXCM? Where will you be focusing your resources in the coming months?
Drew: We are growing 3 businesses in particular.
1. Our commodity, metal, and index CFD business. It is now over 30% of volume and growing and we are offering a very strong solution that is unique in its ability to handle tough flows in an industry that has no A book alternatives other than the futures exchanges. This is still at an early stage but we believe that in the next year as this technology matures we will be in a position to gain significant market share and make a very large impact on that business.
2. We keep investing in new data products and API products to our automated and algo trading clients. Be it EA developers or custom black boxes. This is also at an early stage as we aim to be the go to provider for this market segment and believe that between data and connectivity solutions we have a very unique value proposition for this client base.
3. Most importantly, as we sell our non-core assets, all of the firm’s 150 technology staff, all its financial resources, its sales efforts are focusing purely on the retail client and we are going to be introducing quite a few interesting innovations this year for the general client base with new platforms, more data, faster connectivity and many other enhancements to make sure that FXCM is still one of the foremost retail FX franchises for years to come.
LR: How is FXCM doing things differently today as opposed to before last January’s Swiss Franc event? If there was another surprise currency spike, how is FXCM managing things differently today?
Drew: We have done much soul searching and revamping after SNB but I can sum up the most important changes in the following. FXCM has eliminated many of its less liquid currency pairs specifically those that carry a large government “active management” of some sort of an artificial structure be it a peg or managed float of some kind. We have also reduced leverage for our largest clients and have purposefully turned away business we deem to be too capital intensive. Our current exposure to any market spike is a tiny fraction of what it used to be.
LR: How do you think that the Retail FX industry as a whole has changed since the Swiss Franc event last January?
Drew: The biggest change for the Retail FX industry is the perception of it now as a very serious credit risk by banks which has prompted many prime brokers to not take retail FX firms as clients or to severely restrict their leverage and raise their fees. This has meant that many firms have had to make alternate arrangements with prime of primes or directly with other sources of liquidity. This is not a good development and one that will just further complicate modernizing the industry and making it more transparent as it disincentives firms from doing a lot of A book business.
LR: The restructuring of your loan terms with Leucadia seems to have disappointed investors. We would imagine that your shareholders were looking more for a conversion of Leucadia’s rights into a ‘straight’ equity stake in FXCM – which would both simplify your capital structure, and return to your shareholders more of the ‘upside’ in FXCM – something that the shareholder of any company wants. The restructuring seems to have been done mainly for the benefit of FXCM management. Can you address this issue? Were other restructuring options looked at? Is it possible that the deal with Leucadia will be re-done in the future?
Drew: I think there is a misunderstanding of the deal that we struck with Leucadia on the day of SNB.
That deal transferred much of the upside to them, and much of that has not changed, in fact it has gotten better for ALL other stakeholders. The stock spiked in the weeks prior to announcement after it was disclosed in Leucadia’s filing that they were negotiating the terms of the deal with us, and then the stock declined when the speculation of some quick kill free upside didn’t materialize.
As we have explained in the past the Leucadia deal prioritizes pay back to creditors as the first step. We must first pay back the Leucadia loan, then pay back our convertible bonds, and only afterwards can common stock holders begin to have an upside. This is something we are working on night and day and while this is a process that will take multiple years I am optimistic that in the end patience will pay off.
Management does not get any significant reward until Leucadia is fully paid off and other creditors are well on their way. Once the convertible bonds are paid off value returns very quickly to the common shareholder. Anyone looking for a quick kill should look elsewhere as this is a process that will likely take a very long time. Leucadia is committed as a long term shareholder and has held some of their other investments for decades. We are looking forward to a very long and fruitful relationship and one that will serve our customers and our shareholders in the long run.