The Fall of FXCM: Bleak Picture After Jefferies' Rescue

Recently, Jefferies Financial Group Inc (NYSE:JEF), an international investment bank and financial firm, filed its quarterly report to the Securities and Exchange Commission (SEC) for the 3-month period until February 28, 2022. The report shows that the banking giant's investment in FXCM and associate companies consists of a senior secured term loan due February 8, 2023 (USD 71.6 million principal outstanding on February 28, 2022), a 50% voting interest in FXCM and rights to a majority of all distributions in respect of the equity of FXCM.

Jefferies' maximum exposure to loss, due to its investment in FXCM, is limited to the total of the carrying value of the term loan ($50.3 million) and the investment in associated company ($49.1 million) on February 28, 2022. The total is $99.4 million, virtually unchanged compared with the last quarter ($99.5 million).

So how does FXCM show signs of failure?

Founded in 1999, FXCM witnessed a rapid expansion in the first decade, becoming a world-renowned multi-asset broker. However, on January 15, 2015 following a large increase in the price of Swiss francs, FXCM lost $225 million and was in breach of regulatory capital requirements. Later, it was rescued by Leucadia National Cor, the predecessor of Jefferies, with a $300 million loan to keep operating. The investment enabled Leucadia to own a 49.9% equity share of FXCM with a 65% economic interest.

"FXCM continued normal operation with Leucadia's $300 million emergency rescue loan on stringent terms. FXCM's annual profit only amounts to $3 million with 40 million shares in active circulation ($0.76 per share). It is impossible for FXCM to repay all the debts in 2 years as agreed. Clients may withdraw their capital due to concerns about bankruptcy. The US regulatory bodies may also require a lower leverage for FXCM, which will make FXCM less attractive to its customers and will adversely affect its profitability. Though FXCM pulls itself back from the brink of insolvency with rising share price, it is still doomed to go bankrupted or get merged in the long run." a post in a popular Chinese forum received dozens of likes at that time.

What makes it even worse is that on Feb. 6, 2017, the NFA barred FXCM from membership due to "numerous deceptive and abusive execution activities that were designed to benefit FXCM, to the detriment of its customers."

According to Leucadia's Q4 2017 financial results, FXCM paid off $93 million of Leucadia's senior secured loan in 2017, with $70 million remaining outstanding, and Leucadia would receive up to 75% of future cash distributions after the loan is fully repaid.

As of August 31, 2019, Jefferies' loss due to its involvement in FXCM reached $13.14 million, according to a report Jefferies sent to SEC.

Withdrawal issues, high latency, large slippage... The once-dominant forex broker in Asia is now witnessing business down the drain, losing many of its market shares to rivals. Jefferies rescued FXCM 6 years ago, now it has to consider how to rescue itself from the mire of FXCM.

The financial industry in changing rapidly and constantly. As an proverb goes, all that glitters is not gold. A company that fails to provide quality customer service and wants to seek gains through trickery would ultimately cause backfire to itself, regardless of its size, reputation, and strength.