Euro to Swiss Franc (EUR/CHF) Cap Removal Causes Major Exchange Rate Movement
Last week the Euro to Swiss Franc (EUR/CHF) exchange rate registered its largest daily decline on record as a result of the Swiss National Bank (SNB) announcing it was removing the 1.20 tie between the Single Currency and the ‘Swissie’.
The move took markets by complete surprise and the Swiss Franc rallied against currencies such as the Pound (CHF/GBP), US Dollar (CHF/USD) and the Euro (CHF/EUR).
But the surprise nature of the manoeuvre caused a whole host of problems.
Swiss Franc (CHF) Shift Impacts Alpari Forex Brokers
Currency movement is generally quite small, with a 1-2% shift in a currency pair considered to be fairly notable. However, the Swiss Franc shot up against other currency majors (CHF/USD, CHF/GBP, CHF/EUR) by over 30% on the release of Thursday’s SNB decision.
Because market movement can be relatively muted, traders can bet tens or even hundreds of thousands each day to make the most profit.
The problem for traders on Thursday was that the Swiss Franc jumped by around 30% almost instantaneously and the Euro simultaneously flat-lined.
Since the event, some speculative foreign exchange brokers have been experiencing major issues.
That being said, most commercial brokers, such as the kind you would use for transferring funds for an emigration or overseas property purchase, haven’t been affected by the development as they match client deals with their bank and have no material exposure to FX fluctuations.
Speculative brokers, on the other hand, operate on a ‘betting’ style system where they attempt to anticipate the direction the forex market will move in and profit if their speculation proves accurate. This can be extremely risky because if a completely unforeseen turn of events occurs (such as the SNB move) and a currency like the Swiss Franc rockets by such an extent, the company can lose a huge amount of money.
FXCM 225 Million Dollars in the Red after SNB Announcement
As reported by Bloomberg: ‘FXCM Inc., which handled a record $1.4 trillion of trades by individuals last quarter, said clients owe over $225 million on their accounts after the Swiss Nation Bank’s decision to abandon the Franc’s cap against the Euro roiled markets worldwide.’
FXCM is a major company that conducted 595,126 trades every single day. December alone saw FXCM trade $439 billion in currency—we’re talking big money.
FXCM stated: ‘Some of our methods for managing risk are discretionary by nature and are based on internally developed controls and observed historical market behaviour. These methods may not adequately prevent losses, particularly as they relate to extreme market movements.’
As a result, FXCM has been forced to secure a $300 million loan in order to cover clients’ losses.
Similarly, companies such as Global Brokers NZ Ltd. have gone under as a result of the Swiss Franc movement.
So the Swiss National Bank was inadvertently able to pull down companies with massive trading power, as well as other smaller brokers.
Bloomberg continued: ‘IG Group Holdings PLC estimated an impact of as much as 30 million British Pounds and Swissquote Group Holdings SA set aside 25 million Francs.’
Forex brokers all over the world have felt the impact, including in the UK.
Alpari UK, the sponsor of English premier League Football Club West Ham, was rumoured to have officially filed for insolvency on Friday—a development the broker has denied.
Alpari stated: ‘For the avoidance of any doubt and notwithstanding previous announcements by the company, Alpari (UK) Limited has not entered a formal insolvency process.’
Now, Alpari UK is exploring the possibility of a sale.
The retail broker stated: ‘The board of directors are urgently considering all options including a sale and are liaising closely with the FCA. We hope to make a further announcement shortly.’
So what does that mean for clients? Alpari froze all accounts on Friday and refrained from any contact with clients as it tried to contain the effects of the Swiss National Bank announcement.
Alpari commented: ‘[The action] caused by the SNB’s unexpected policy reversal of capping the Swiss Franc against the Euro has resulted in exceptional volatility and extreme lack of liquidity. This has resulted in the majority of clients sustaining losses which exceeded their account equity. Where a client cannot cover this loss, it is passed on to us.’
Alpari wasn’t the only UK institution to be damaged; Barclays stated that it had suffered losses of ‘tens of millions’ of British Pounds (GBP).
The Swiss National Bank’s move has caused major global losses to individual clients as well as influential brokers and the bad news could continue as companies try to manage losses.
Industry expert Nick Parsons commented: ‘I would be astonished if we did not see more casualties. This was a 180-degree about turn by the SNB. People feel hurt and betrayed.’
