Alpari UK and FXCM after 15 January 2015, and what broker solvency means for you

[Fairman]

Alpari UK and FXCM after 15 January 2015, and what broker solvency means for you

Most posts about the SNB removing the EURCHF floor on 15 January 2015 talk about the price move. EURCHF fell from 1.20 to well below parity within minutes, and many stops were filled far from where they were placed. Less discussed is what happened to the brokers.

Alpari UK went into insolvency days afterwards because client losses beyond their account balances were too large to absorb. FXCM, one of the largest US retail brokers at the time, needed a $300 million rescue loan from Leucadia to stay in business. Several smaller firms also had problems. Clients who went negative were in some cases asked to repay the debt.

The point for scalpers today is that broker choice isn't only about spread and execution. When something extreme happens, the questions that matter are:
Does the broker offer negative balance protection, so you can't lose more than your deposit?
Are client funds held in segregated accounts?
Which regulator covers your account, and is there a compensation scheme if the broker fails?

In the UK and EU, retail clients now get negative balance protection as a regulatory requirement, introduced by ESMA in 2018. Outside those regions it depends on the broker and the entity. If you're with an offshore entity of a large group, the protection may be different from what the same brand offers in Europe.

I'd read the client agreement section on negative balances once. It takes ten minutes.

For a scalper the practical version is short. Know which legal entity holds your account, know whether negative balance protection applies to it in writing, and keep spare capital somewhere other than the trading account. Those three things cost nothing and would have changed the outcome for a lot of people in 2015.

[FXS HongKong Scalper]

The broker side of that day is often forgotten. One useful check today is whether a broker's client money is held in segregated accounts and whether there is a compensation scheme, and up to what amount. In the UK the FSCS covered clients of Alpari UK up to the scheme limit. Many offshore brokers offer nothing similar. Spreading money across more than one broker, and keeping only the amount needed for trading on account, also limits the damage if a broker fails after a big move.

[Fairman]

Segregated funds aren't a full guarantee either. Segregation means your money is held separately from the broker's own funds, which helps if the broker fails. But if the broker's own losses exceed its capital, the process of returning client money can take months. With Alpari UK, clients waited while the administrators worked through the claims. Having more than one broker, and not keeping more capital at any single one than you need for trading, reduces the impact if this ever happens again. That loan came with tough terms and FXCM's US business was later sold. The firm's later trouble with US regulators in 2017 was a separate issue.

[Fairman]

The UK Financial Services Compensation Scheme covers eligible clients of authorised investment firms up to a limit, currently £85,000 per person per firm. That's a backstop, not a reason to ignore the rest. Most offshore regulators don't have anything similar. If your account says something like international entity, the protection may be much thinner than the brand name suggests. It also covers only eligible claims and only firms that are authorised in the UK, so a UK brand name on an offshore entity won't help. The register on the FCA website shows which entity holds your account, and the account opening documents should name it. Checking costs five minutes.

[Fairman]

What I'd take from 2015 at the trade level is to avoid pairs where a central bank holds a peg or floor in place, at least with positions sized as if the pair were freely floating. A pegged pair can sit still for years and then jump a long way. Your stop will be filled wherever the market reopens. Size for the gap, not the stop distance, or don't trade it at all. The same applies to currencies where a central bank has said it will defend a level, even without a formal peg.

[Fairman]

It's also a reminder about leverage. Many clients who went negative in 2015 were using very high leverage on EURCHF because the floor made it seem safe. The ESMA rules from 2018 capped retail leverage on majors at 30:1, partly with events like that in mind. Even if your broker offers more, you can always use less. Choosing a lower leverage setting on your account doesn't cost anything and limits how badly a gap can hurt. A lower leverage setting also makes oversizing harder when you're tired or rushed. It's a setting most people never touch.