Jefferies investment bank reveals a max loss FXCM exposure of $82.8M

Jefferies Financial Group, an investment bank headquartered in New York, revealed a maximum loss exposure of $82.8 million on its investment in FXCM. The loss exposure suffered by the financial service provider was for the period between December 2022 and February 2023.

Jefferies suffers $82.8M maximum loss exposure

The New York-based company revealed the numbers in the Form 10-Q filing with the US Securities and Exchange Commission (SEC). The filing shows that the maximum loss exposure reported by Jefferies on its FXCM investment dropped during the last quarter compared to the $94.8 million reported between September and November 2022.

The latest quarterly filings by Jefferies also show that the company reported $46.7 million in equity interests in its FXCM investment. The figure also declined from the $59.7 million reported at the end of November 2022. The equity interests reported by the investment bank comprise 50% of the voting rights.

The SEC filing further said that “We also have a senior secured team loan to FXCM due May 6, 2023, which is accounted for at a fair value of $36.1 million and $35.1 million, [on] February 28, 2023, and November 30, 2022, respectively, and is reported within financial instruments owned at fair value in our Consolidated Statements of Financial Condition.”

The company also considered FXCM a variable interest entity (VIE). Additionally, the investment bank’s term loan and equity interest were variable interests. The assets that FXCM owned were mainly made up of brokerage receivables and other financial assets and operations. These assets comprised the majority of FXCM’s foreign exchange trading operations.

Maximum loss exposure attributed to the nature of the business

Jefferies is the primary beneficiary of variable interest entities. The filing has said that the maximum exposure reported by the group depends on the nature of the variable interest in VIEs. It further clarified that the exposure was different from the carrying value.

The filing noted that the maximum exposure to loss reported in the latest SEC filing did not constitute offsetting the benefits gained from financial instruments that might have been used to hedge against the company’s variable interest risks. It noted that the figure was not determined by the amount of collateral held by the company when transacting with a VIE.

Jefferies has been facing intense competition in the brokerage industry, forcing it to make drastic changes. In 2022, the investment bank shut down its forex prime brokerage division. The company later migrated its clients to another institution.

Two former executives at Jefferies also quit the investment bank and founded a cryptocurrency company, Crossover Markets Group. The crypto company received support from several brokerage companies. The move created an execution-only Cryptocurrency Electronic Communication Network (ECN). The development added to the growing list of brokers interested in crypto offerings.