West Ham's Shirt Will Never be the Same Again

SNB's CHF decision claims a few scalps.


The Swiss National Bank (SNB) shocked markets last week by announcing it would abandon its minimum exchange rate, sending convulsions across foreign-exchange (FX) desks.

Alpari, one retail FX trading provider, has already been forced to close its doors, along with New Zealand-based Global Brokers. Other popular services, such as FXCM, have warned that losses reach hundreds of millions of dollars.

Indeed, there was a vague sense of morbidity in the newsroom while following these developments last week, with someone occasionally popping up, quietly, asking if we'd seen the announcement from X, or what we thought of Y.

While most of the headlines were on the retail impact, institutions found it hard to get orders filled as liquidity evaporated in the wake of the SNB's announcement. Our sister title FX Week has one of the more complete reports from both angles.

It was somewhat curious on the day, however, that out of the leading mainstream UK media, no newspaper or broadcast service carried the story above the fold on their websites. Indeed, the only mention that I could find were a few articles referencing Alpari's downfall, in the context that they sponsor soccer club West Ham United FC's strip. And people wonder why the public isn't more educated on the workings of financial markets.

Tech Tantrums
Some were quick to blame the technology, of course, saying that if better risk systems had been in place then this wouldn't have had such a widespread impact.

"What the effects of the SNB announcement last week have shown is that the existing reliance on post-trade monitoring tools for credit and counterparty risk in the FX market is simply no longer good enough. Unlike some asset classes, the FX market has not yet adopted widespread pre-trade risk management controls and the over-the-counter nature of FX has made effective and efficient pre-trade risk management difficult," says Gil Neihous, CEO of FLuent Technologies, in an e-mail fired out to the inboxes of journalists on Sunday eveneing. "Prime brokers, for example, naturally assign billions of dollars in credit on some of the 60 different FX venues. During major events, it takes minutes and even hours to change or remove these scattered credit limits, causing devastating consequences, just like those of the recent events."

Naturally, though, there's little that even real-time risk technology can necessarily do when the exchange rate drops by 30 percent over the course of the morning. It's a shock event by any standard.

"After the SNB had previously affirmed it would defend the EUR/CHF floor, understandably no-one saw what was coming. It was a bolt-out-of-the-blue move that shook the markets to their core," says James Stanton, head of FX at deVere Group. "The move yesterday heralded the start of a new currency war. Due to the enormity of this tide shift and the scope of volatility it has generated, we expect that turbulence is here to stay for a while yet."

While most expect an equilibrium to develop, and for the volatility to settle, another potential technology angle came from a more mundane area - the pricing on bank platforms. One major bank is reportedly looking into a scenario where, for several hours, clients in Asia were able to trade at old rates in CHF pairs on their service due to it not updating.

All in all, then, not a great day for the FX industry, or for the reputation of the SNB.


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