OANDA took $45 million capital hit in January; GAIN Capital just $6 million – LeapRate Exclusive

LeapRate Exclusive… As we reported yesterday CFTC January data for retail forex brokers is now out, and (not surprisingly) showed a 15% decline in client assets at US industry leader FXCM Inc (NYSE:FXCM) and an overall 5% decline in US retail forex client assets. Again, not surprising given that January 15 saw a lot of clients wiped out in the Swiss Franc spike – and the creation of significant negative client balances at a number of retail forex brokers worldwide.

However digging deeper, the CFTC data uncovered a fairly accurate picture, in our view, of what January 15 meant at other leading US retail forex brokers – at least in their US operations.

The one datapoint which stuck out was the $45 million decline from December to January in OANDA’s adjusted net capital. OANDA’s capital cushion (i.e. excess net capital) dropped from more than $61 million to under $16 million.

US forex broker capital

As per the chart above, at the end of December OANDA’s regulated US entity reported capital of $87.2 million.

As at January 31 – down to less than half that, $41.7 million.

A drop of $45.5 million.

OANDA provided LeapRate with the following statement, indicating that at least some of the capital decline was due to shifting some of its US capital to other OANDA subsidiaries abroad. However they did not specify just how much of the $45 million was transferred out, and how much represented losses. In any event, we have to assume that the reasons for a capital shift to other OANDA entities would include the need to cover capital issues at those other entities which may have also suffered losses in the Swiss Franc spike.

OANDA Chief Marketing Officer Drew Izzo stated:

Our excess net cap has reduced for two reasons. First, events surrounding the SNB did impact us as they did almost every forex broker. Second we have moved some of the excess net cap from our US entity to other entities to provide a greater global capital buffer. The SNB crisis helped us realize the importance of maintaining larger buffers in all our entities as it takes time to transfer capital globally. There are additional changes we’ll report in February that will raise our excess net cap reported to NFA by ~$25M.

How about some of the other leading US forex brokers?

Well we already knew that FXCM took a $225 million hit in the form of negative client balances. After raising a $300 million lifeline from Leucadia (actually, $279 million net of fees), we would have expected FXCM’s capital levels to rise by about $54 million. The actual number was $39.9 million, meaning that FXCM’s Swiss Franc losses were probably larger than $225 million.

The picture at Gain Capital Holdings Inc (NYSE:GCAP) was markedly different, with a capital decline of just $5.8 million in January.

We would note that these figures are for the US entities of these companies only. Further losses (or offsetting gains) might have occurred at other non-US subsidiaries of these brokers. As well, there could be other reasons why capital levels could fall (or rise), such as the payment of dividends to shareholders. But overall, we believe that these capital level changes paint a fairly accurate picture of some of the Swiss Franc spike fallout at these firms, and in the forex sector in general.

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