James Rundle: No CHF-ing Way

There comes a point when the relevance of zeros ceases to apply. Covering financial markets, one often becomes so inured to mentions of vast sums of money that they just seem to be words on a screen, with little real-world impact. Can any of us truly appreciate the scale of one trillion dollars, for instance? To put it in perspective, if you stacked $100 bills to create a “foundation” of $10 billion dollars, and then built upward until you reached the fabled trillion, the tower would be around 465 feet high. Or to put it another way, it would be the same height as the National Newark Building in New Jersey.

It’s easy to fall into the trap of staring listlessly into the middle distance, in the same way as someone might wander the sterile halls of an Ikea warehouse on a Saturday afternoon, when looking over the casualty reports from events in the foreign-exchange (FX) market last week. The Swiss National Bank (SNB) made a shock move by declaring its policy of maintaining a currency ceiling over, and FX desks across the City of London went berserk.

Alpari is perhaps the highest-profile (to date), and the earliest scalp to be claimed by the move, going into administration almost immediately and calling in KPMG to try to stabilize the mess that the SNB’s decision precipitated. New Zealand’s Global Brokers NZ also threw in the towel, while retail FX specialists FXCM had to be rescued by Leucadia to the tune of $300 million. Its share price tanked soon after, nose diving from around $12 to just above $1 by the middle of the following week.

Banks Bruised
These are staggering developments, curiously under-reported among the national newspapers. The banks also took a beating, with the top three dealers reportedly suffering around $400 million in losses, with more expected from other FX market participants. Unconfirmed reports say that some traders were summarily fired as losses mounted. All in all, it was a good day for press agency photographers, who have developed a distinct specialization in photographing distraught traders since 2008. Not so much for many others, such as Everest Capital, which was forced to close its $830 million main fund.

The usual routine of comments from specialists picked up in the days following, bombarding journalists’ inboxes with juicy sound bites, most predicting a new currency war. Others were a little more measured, questioning the risk management technology that some firms had in place. Indeed, some extolled the virtues of their own risk systems, which left them intact during the fallout.

The Swiss National Bank’s move highlighted the need to continuously adjust credit limits, prices, and control positions within a firm.

“Risk management is at the heart of what we do and the machine performed admirably,” says David Cooney, CEO at FX trading provider MahiFX. “Despite market conditions our systems and trading progressed as usual and we look forward to continuing to provide clients with the highest levels of service.”

Continuous Adjustment
Either way, it’s highlighted the need to continuously adjust credit limits, prices, and control positions within a firm, particularly when such huge sums are at stake. Some may have even benefited from technology issues, with Asian investors reportedly able to trade at stale rates when some bank platforms didn’t update their prices for hours.

Given the scale of certain markets such as those that involve derivatives, or the size of recent regulatory fines, it’s easy to dismiss “just a few hundred million dollars,” if only in passing. But probably not if you’re one of the folks now out of a job. And while technology vendors in this space are sure to jump on the CHF bandwagon, it’s difficult to argue that they don’t have a case for doing so, given the woeful state of risk technology within FX circles. Clearly, it’s due for an overhaul.