The history of Forex, and this is good news, is not at all littered with stories of
failed Forex Brokers. In fact, it is not a frequent occurrence. Certainly, there have been brokers (or self-proclaimed ones) who have taken the money and run, cheating the traders who had placed their trust in them, but this is another matter, and it concerns those associations, which we would have no hesitation in calling "criminal", that certainly did not enjoy the protective hat of regulatory bodies, and which should be avoided at all costs.
The issue of failed Forex Brokers, in fact, concerns
honest brokers, who carry out their intermediation activity within the bounds of legality and who respect the rules. Unfortunately, some cases have occurred in recent years, opening up the debate on the vulnerability of brokers and, in general, the financial system. We would like to point out that the cases we will present do not involve a clear assignment of blame. The brokers that have failed, or that have come close to failure, have mainly been victims of circumstances and some unforeseen events. In some cases, they have managed to brilliantly overcome the moment, as much as possible, reducing the damage and fulfilling their primordial task, which is to put themselves at the service of clients.
We will address the topic by first discussing the reasons that cause a Forex Broker to fail, then describing the events that generally follow a failure, especially from the traders' point of view. We will conclude by dealing with two cases that have caused a stir in recent years:
Alpari and FXCM. The first failed in the true sense of the term, the second came frighteningly close to it. In the first case, there were consequences for traders, but only up to a certain point. In the second case, the worst was averted. However, it is good to point out that both cases were generated by the same event, which among other things had an exceptional nature.
Why does a broker fail?
Good question. We can refer to the failure proper, which involves any organization that offers services to clients. Generally, failure follows a terrible management of the organization, so specific and individual faults can be "appreciated", and some heads that should have rolled have remained firmly on their shoulders. For Forex Brokers, at least those that are the subject of this article, it is different.
The cause of the failure is to be found in exceptional events, which shuffle the cards on the table and which were largely either unpredictable or unlikely.
These are events that influence the market in a clear, irreversible and sensational way. It is not necessary to go very far to find an example. One can safely stay in Europe and go back two or three years. The Swiss central bank, officially the Swiss National Bank, straddling 2014 and 2015, made an epochal decision: it eliminated the cap (actually a floor) of the euro-franc exchange rate, which was 1.20. Well, immediately the franc began to appreciate, moreover in an uncontrollable way. If this event has certainly pleased cross-border commuters, who have seen their purchasing power almost double, it has thrown investors into a panic.
Obviously, this decision was unpredictable and, once undertaken, the effects were unpredictable. Or, to put it better, the strength of these effects. In any case, technical analysis could never ever have offered any indication in this regard, preparing traders for this event, which was, in fact, unpredictable.
Now, brokers are generally market makers, especially in Forex. This means that they respond to traders' orders, precisely to make them executable, with a compatible order. Well, the brokers got into trouble, because they lost a lot of money, deeply undermining their balance sheets. All for a cause of force majeure, which did not depend on management approaches and solutions.
What happens when a Broker fails
Obviously, not all brokers have fallen, but only one: Alpari. The discriminating factor in this case was not the suffering, but the extent of the exposure to the franc-euro currency pair and the parachutes prepared - consciously and unconsciously - to deal with crisis situations.
In any case, even after a broker has failed, it is not a given that traders will suffer damage, other than the fact that they will no longer be able to trade with that broker. It generally depends on two factors.
Firstly, on the approach to account management. Some regulators require
the segregation of accounts, but not all. If accounts are segregated, it means that traders' deposits cannot be violated in any way by brokers. In plain words, not even in theory can clients' money be used to smooth out the broker's losses. Still in theory, even a failed broker should be able to guarantee clients the possibility of regaining possession of their money. In the best-case scenario, the process is really long. In the worst-case scenario, there is nothing that can be done: there is no liquidity, period.
For this reason, brokers use the most disparate safeguards, most frequently insurance policies which, up to a certain limit, allow clients to enjoy a more or less substantial reimbursement, more or less close to 100%. The maximum amounts, however, are not necessarily sufficient to cover traders' accounts, especially those of the wealthier ones.
The Alpari case and the FXCM case
Alpari clinically died on January 16, 2015, that is, a few hours after the SNB's decision to eliminate the cap on the euro-franc exchange rate. In plain words, the Swiss currency appreciated by 41%. Something never seen before, more or less. The result? Alpari's clients recorded sensational losses. The problem emerged almost immediately, that is, when the traders' losses exceeded the capital accounts. Now, FCA legislation requires the broker to be personally liable for the shortfalls, and from there the step to insolvency was short, very short indeed.
Alpari could do nothing, or almost nothing to avoid the crash. Luckily, the accounts were segregated and so it managed to return all or part of the money to the traders. Specifically, if the accounts did not exceed a balance of 50,000 euros. In any case, Alpari left the scene forever.
And FXCM? Same situation but different epilogue. It also suffered sensational losses due to the convulsive appreciation of the franc, but it was lucky - or clever enough to save itself at the last minute, depending on your point of view.
FXCM simply saved itself because it found an investor to finance the losses, putting the exorbitant sum of 300 million euros on the plate.
Alpari is dead, FXCM is still standing. The fact is that two efficient, authoritative and esteemed brokers failed or came close to failure due to a cause of force majeure.
