FXCM plunges, regains some ground with shares halted after Swiss franc peg dropped

By Rebecca Melvin

New York, Jan. 16 – A primary focus of Friday’s trading session was the FXCM Inc. convertibles, which plunged to as low as 30 and then regained ground to trade in the mid-60s, as shares were halted pending news of how the New York-based foreign exchange would cope with massive client losses. The losses are related to the spike in the Swiss franc after the Swiss National Bank dropped its currency cap versus the euro on Thursday.

FXCM warned that client losses caused by the Swiss franc’s surge when the cap was removed may have put it in breach of regulatory capital requirements. But late Friday, Leucadia National Corp., which owns Jefferies Group LLC, said it extended to FXCM a $300 million two-year secured term loan with an initial coupon of 10%.

The deal will allow FXCM to continue normal operations and was reminiscent of Jefferies’ rescue of Knight Capital Group Inc. in 2012 after the electronic trading firm suffered $440 million in losses due to a trading error.

“FXCM was kind of the focus [today]” a New York-based trader said. “There wasn’t an astronomical amount of volume, but it was what everyone was watching.”

Gain Capital Holdings Inc.’s 4.125% convertible senior notes came off as well, although shares of the Bedminster, N.J.-based trading services provider were positive after the company said that it actually made money through the sharp currency move. The Gain Capital bonds traded at 96.875, which was down from 103 to 104 previously, according to Trace data.

The havoc caused by Swiss National Bank’s move didn’t seem to extend beyond those two names, a Connecticut-based trader said.

Elsewhere, Intel Corp.’s convertibles were generally unchanged on a dollar-neutral basis after the Santa Clara. Calif.-based chip maker posted positive fourth-quarter earnings, a trader said.

Tesla Motors Inc.’s 1.25% convertibles trended lower this past week to about 84.5 bid, 85.5 offered on Friday with the underlying shares at $192.00, which was down from 86 to 88 a week ago with shares at about $206.00.

Spurring Tesla’s move lower this week was news that the Palo Alto, Calif.-based electric car maker’s fourth-quarter China sales were down and that chief executive Elon Musk said he doesn’t see the company turning a profit for another five years.

Convertibles players described the market as mostly stable on Friday, as stocks rallied, but still ended down for the week, following a five-day losing streak. And convertibles traded quietly ahead of the three-day holiday weekend. Financial markets will be closed on Monday in observance of Martin Luther King Jr. Day.

FXCM plunges, recovers

FXCM’s 2.5% convertibles due 2018 fell to as low 30 and then traded for a while at 49 bid, 50 offered, before climbing up to the mid-60s. The bonds were previously at 95.

FXCM shares were halted for the entire session but fell about 90% to $1.49 in pre-market action.

The initial moves were sparked by FXCM’s statement late Thursday that it may be in breach of capital requirements following the Swiss National bank’s surprise currency move. The bonds recovered some ground, apparently amid reports that Jefferies was working to throw them a financial lifeline, market sources said. After the market close, news of that lifeline was forthcoming.

Any “way to prolong the life of FX is going to be a huge positive,” a New York-based trader said ahead of the market close.

FXCM said in its release late Thursday that due to unprecedented volatility of the EUR/CHF pair, clients experienced significant losses, and generated negative equity balances owned to FXCM of about $225 million.

There was some weakness in the overall convertibles market on the back of the FXCM news but not a lot of volume.

Gain Capital’s chief executive said that his firm was able to weather the blast on Thursday because they had implemented policy changes that limited leverage associated with Swiss franc currency trades.

He said the firm was having discussions with clients on policy changes as early as June.

Mentioned in this article:

FXCM Inc. Nasdaq: FXCM

Gain Capital Holdings Inc. Nasdaq: GCAP

Intel Corp. Nasdaq: INTC

Tesla Motors Inc. Nasdaq: TSLA

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