Unless you’ve been living under a rock, you’ve probably heard the news that the Swiss National Bank decided to scrap its currency peg recently. Not only did this surprise move cause a jaw-dropping franc rally, but it also resulted to unforeseen losses for forex brokers and their clients.
Right around the time SNB head Thomas Jordan decided to drop the bombshell on the markets, the Swiss franc surged by more than 40% against the euro as EUR/CHF plummeted by roughly 2000 pips in a matter of minutes. This unprecedented spike in volatility led to several stops being hit and margin calls triggered, with some leveraged accounts suffering instant negative balances that day.
You can imagine how terrible that must feel to have a short franc position open overnight, thinking that there’s no way but up for EUR/CHF and other Swissy pairs, then waking up the next day to discover that your account has been completely wiped out and that you actually owe your broker a lot of money!
If you think that the damage on retail traders’ accounts is bad enough, then you should consider the cumulative loss for forex brokers, as not all the outstanding amounts owed by clients can be collected. No wonder some brokers are already worrying about insolvency!
In fact, U.S. forex broker IG Group already issued a profit warning as its losses amounted to $45.4 million so far. FXCM announced that it might have to break some regulatory capital requirements, as it tapped a $300 million credit line after client losses amounted to $225 million. A couple of brokers in New Zealand, namely Global Brokers NZ Ltd. and Excel Markets, reportedly had to close shop.
Fortunately, other forex brokers maintained that business can go on as usual, with some reassuring their clients that their balance sheets remain strong and not materially affected by the SNB shocker. What probably kept some of these firms’ heads above water was their decision to temporarily suspend franc trading right when the markets were in a ruckus. Such was the case for FXOpen and FXPro, both of which have already resumed franc trading and reported minimal damage among their client accounts.
Industry experts cautioned that the worst isn’t over, as the aftermath of the SNB surprise announcement stretched to the equity markets and caused a wave of losses for hedge funds as well. John Hancock Absolute Return Currency Fund, which had large short franc positions since November, reported an 8.7% loss that day. Some say that the market shock could drag some trading companies into regulatory trouble or even bankruptcy.
If there’s any major takeaway from this event for retail traders like you and me, it’s that anything can happen in the forex market. Not even the large forex firms or multi-million hedge funds with all the analytical tools at their disposal were able to predict with 100% certainty that the SNB would pull the rug from under the EUR/CHF floor at that particular time. Keep in mind though that what kept some of these firms afloat was their ability to react quickly to the market situation and put the appropriate risk management strategies in place.
Any interesting stories you’d like to share on what happened to your broker or your trading account during the SNB announcement? Don’t be shy to post ’em in our comments section below!