What’s next after ‘Swiss roll’?
The Cyprus forex trading and broker industry is bracing for consolidation, with several small firms already barely maintaining sufficient levels of liquidity after suffering heavy loses on the Swiss franc.
The Swiss National Bank (SNB) stunned markets on January 15 that it will no longer support a self-imposed floor on the EUR/CHF exchange rate sending shock waves across the forex market, causing many market participants to be caught out and incur trading losses.
The Financial Mirror estimates that at least five of the 182 investment firms licensed by the Securities and Exchange Commission (CySEC) are being eyed by bigger players wanting to consolidate their position as profitability shrinks and margins get tighter.
Making matter worse, liquidity providers are turning down calls for leverage, which is putting a further squeeze on forex brokers as many scramble to report capital requirements to the regulator.
On the other hand, Limassol-based IronFX was reported as showing interest to bid for Alpari UK after the firm entered administration along with its Japanese subsidiary, but industry sources told the Financial Mirror that the bid is a “long shot” at the moment.
Alpari was one of several high-profile brokerage victims of the franc’s surge after the SNB abandoned its three-year old cap on the currency.
“We are in the process of making a bid and (are) in contact with the administrators,” Dimitris Hatzis, IronFX’s chief operating officer, was quoted by Reuters as saying.
The Wall Street Journal recently reported that IronFX is in an advanced stage of going public in the US, in an IPO which could value the company at about $800 mln and give it a powerful arsenal to buy up rivals.
KPMG, administrators for Alpari, are reportedly in discussions with a handful of firms to secure a quick sale to keep staff and clients and as much of the business intact as possible.
Alpari was initially set up in Cyprus by one of its cofounders, Andrey Dashin, but after the shareholders decided to move to the UK, he stayed behind and established his own firm, ForexTime (FXTM).
London-based ETX Capital also put in a proposal to acquire Alpari UK, according to LeapRate, while Alpari UK officials in London denied any acquisition by FXCM Inc.
In any case, the Russia arm of the Alpari Group, which emerged unscathed from Swiss Franc Black Thursday, has continued a PR and marketing campaign to help distance itself from the fate of Alpari UK and is going after former Alpari UK clients, with a 30% deposit bonus.
The consolidation in the Cyprus FX market is something that the authorities are looking at with a positive eye, as they do not want news to emerge that two years after a banking crisis, Cyprus-based forex brokers were going belly-up and shutting down.
On the contrary, some experts are confident that Cyprus market will expand with new players coming in.
“The forex sector (in Cyprus) is definitely still growing. New firms are being set up and we believe this will continue unabated within 2015,” said Dr. Stelios Platis, Chairman of the Association of Cyprus International investment Firms (ACIIF).
“It is however a risky, capital-intensive, very competitive and aggressive industry where margins are becoming smaller and smaller. Therefore, some global consolidation of the industry should be expected soon – especially in the aftermath of events like we had last week with the Swiss Franc.”
Platis explained that it is, after all, the financial services sector and market events determine the path of the industry.
“Regarding the Cyprus-regulated forex brokers and specifically the Euro-Swiss Franc debacle, given the size of the sector the EUR 40 mln losses for the sector are not significant. It appears that the Cyprus forex industry is much more resilient than people outside expected.”
“Don’t forget we survived a haircut and basically the collapse of the local banking sector and are still growing!” he added.
Meanwhile, CySEC Chairman Demetra Kalogirou said that there is growing interest from companies in Russia, Luxembourg and Greece to set up Undertakings for Collective Investment in Transferable Securities (UCITS), while there were 14 applications for alternative investment funds (AIF), five of which have been approved by the CySEC board.
European legislation provides that such entities can manage funds of over EUR 100 mln, Kalogirou explained, adding that in certain cases their purpose is to invest in Cyprus, such as in the shipping sector or others that have good growth prospects.
CySEC has also received from the Central Bank 12 pending applications for the establishment of private investment plans (ICIS), while the UCITS management company GMM, which has already been licensed, has issued three mutual funds, of which two are single schemes and one is an umbrella with 14 sub-funds.