Swiss Franc Spread Betting Losses

Swiss Franc Spread Betting Losses
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The most traded currencies on the FX market are the U.S. Dollar, the Euro, the Japanese yen, the Swiss franc, the Canadian dollar, and the British pound.
The Swiss franc is regarded by many as a sort of “neutral” currency. Part of this reputation comes from the fact that the Swiss National Bank actively takes steps to ensure that the franc only trades within a fairly small span. Combined with Switzerland´s long-term social and political stability, the Swiss franc has earned the image of being a safe haven within the FX market .
The Swiss franc is the currency and legal tender of both Switzerland and Liechtenstein. It is also legal tender in Campione d´Italia, an Italian exclave surrounded by the Swiss canton Ticino.
The smaller denomination of the Swiss franc is 1/100 of a franc. It is named Rappen (Rp.) in German, centime (c.) in French, centesimo (ct.) in Italian, and rap (rp.) in Romansch.
As the Greek sovereign debt crisis escalated in 2011, investors sought safety in the Swiss franc and the price of the CHF started rising steadily against the USD. The spread of the crisis to other parts of Europe, and the continuing debt crisis in the USA, helped fuel the situation. Before 2011 was over, the nominal short-term Swiss interest rates had become negative.
March 2011: The franc climbed past US$1.10
June 2011: The franc climbed past US$1.20
August 2011: The franc climbed past US$1.30
In August 2011, the Swiss National Bank (SNB) took measures to counteract what they called a “massive overvaluation” of the franc.
On 6 September 2011, the bank set a minimum exchange rate of 1.20 francs to the Euro, i.e. they capped the franc´s appreciation. Just before, the exchange rate was 1.095 CHF for 1 EUR, indicating that the Swiss franc would soon be on parity with the Euro. In conjunction with the capping, the SNB announced that they were prepared to buy foreign currency in unlimited quantities.
Within 15 minutes after the announcement, the exchange rate had changed from 1.12 CHF for 1 EUR to 1.22 CHF for 1 EUR, and the Swiss franc had also lost 9% against the U.S. dollar. On the day of the announcement, the CHF also fell at least 8.2% against all 16 of the most active currencies. This chocked some FX traders, who had previously regarded the franc as a safe haven, and who had not believed that the SNB would employ such effective measures.
In December 2014, the SNB tried to save its cap by introducing a negative interest rate on bank deposits, but to no avail.
SNB abandoned the cap on 15 January 2015, and the franc quickly increased in value by 30% against the euro. Among FX traders, the day became known as Francogeddon, as the plan to remove the cap had not been announced in advance. By the close of the trading day, the franc was up 23% against the euro and 21% against the U.S. dollar.
Several significant currency trading companies and spread-betting firms suffered major losses. Alpari did for instance declared insolvency, FXCM needed to be bailed out by its parent company, and Global Brokers NZ announced that it could no longer meet the minimum capital requirements required by law.

People queue at a currency exchange office in Geneva on 15 January, after the shock move by Switzerland’s central bank
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The spread-betting giant IG has admitted that it may never claw back most of the £18m lost by its clients after the Swiss scrapped their currency ceiling – and now its credit controls are under scrutiny. Russell Lynch investigates
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The spread-betting giant IG has admitted that it may never claw back most of the £18m lost by its clients after the Swiss scrapped their currency ceiling – and now its credit controls are under scrutiny. Russell Lynch investigates
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“I had no control. I was panicking.” For Marcel Zidani, a concert pianist and part-time currency trader, 15 January will live long in the memory for all the wrong reasons.
Mr Zidani was one of the hundreds of customers of the spread-betting giant IG Group holding big bets against the Swiss franc. Those bets went cataclysmically wrong in January when the Swiss National Bank scrapped its €1.20 ceiling against the euro, introduced in September 2011 to stop the “Swissie” surging in value. But two days after the SNB described the ceiling as a “cornerstone” of its monetary policy, it abolished it.
That sent the franc’s value surging, currency brokerages collapsing and hundreds of people like Mr Zidani staring at huge losses for betting the wrong way. The pianist – whose £2 exposure turned into a £5,500 loss – recalls the moment well. Slumped in a chair in his living room in Evesham in the West Midlands, he stared at the numbers on his phone in disbelief. “I looked at the phone and I remember having to sit down because the numbers were going red – £1,000, £3,000. I was trying to press ‘stop’ on the phone and it was just an ‘Oh my god’ moment. I said to my wife, ‘It’s now £3,000, it’s £7,000, it’s £6,000’. It was just up and down. I rang them and I said ‘I can’t pay this’. They said it will stop wherever it stops. I had no control. I was panicking.”
Over in Tipperary in Ireland, there were IG customers with even bigger headaches. Tomas O’Comartuin, a supply teacher who earns just €25,000 (£17,800) a year after tax, was taking a class when his phone bleeped with a text saying the SNB had scrapped the cap. Mr O’Comartuin – who asked to be identified only by his Gaelic name – had an even heftier position and suddenly faced a loss of nearly £280,000. He said: “I got a text message. I was talking at the front of class, gave the children some work to do. Then I got the text, and went to look at one of the computers at the back of the classroom. My first reaction was that there had been some kind of computer glitch. The children were working away, my heart rate was going at 200 beats a minute.” He doesn’t own a house and he has no hope of paying.
The crucial risk in spread betting is that losses – and gains – are magnified by leverage. Take Mr O’Comartuin’s losses. He bet the euro would gain against the Swiss franc and stood to make £100 for every one-hundreth of a cent – one “pip” or basis point in the parlance – move in his favour. But instead the Swissie soared and by the time IG’s clients were closed out, the euro had fallen to €0.925 against the franc. That left him with 2,770 pips of losses – each costing £100 – and a bill of nearly £280,000.
What Mr O’Comartuin and Mr Zidani were trying to do was the financial equivalent of picking up pennies in front of a steamroller. Mr O’Comartuin admits: “The risk-reward looked pretty attractive so I went in pretty hard at it.” Then the handbrake on the steamroller slipped. IG’s total client losses from the unprecedented event have risen to £18.4m from about 370 traders. Although about half have settled, traders accounting for most of the losses have not, and IG is likely to have to write off most of the cash.
A group of traders accounting for the bigger losses are, meanwhile, considering legal action against IG. They had stop-losses that theoretically limited their exposures, but were the victims of an extreme example of what the spread betting industry calls “slippage”. If somebody sets a loss limit of €1.18, they might not get that exact price at times of market turmoil. In some markets, IG offers a “protected” or guaranteed stop but this safety net wasn’t available for euro/swiss trades. In the case of the Swiss franc, the market virtually disappeared as dealing rooms across the world also panicked.
IG initially started automatically closing some positions, at very favourable rates for some lucky clients. IG’s banks later refused to honour these early trades but IG did, costing it £12m. After that, IG began the process of aggregating the positions before trading out of them – in the eyes of the complainants losing valuable minutes while liquidity in the market dried up. It took 45 minutes for IG to unravel the aggregated position, close to the bottom of the market.
Representatives of this group have told The Independent they believe IG is “hiding behind” the turmoil and accuse the firm of incompetence and negligence. They have already gone to the Financial Conduct Authority and are considering an approach to the Financial Ombudsman, although the chances of a victory are slim.
IG, on the other hand, says its “technology worked exceptionally well” and blames the banks for refusing to honour some closing trades. It is also looking for additional liquidity providers to cut the risk of a similar cataclysm in the future. It said: “IG did close out some client positions at very favourable rates for its clients before it became clear that there was insufficient liquidity in the market to justify those prices, or where banks subsequently cancelled IG’s trades.”
But there are also questions to answer over the company’s risk management, which allowed punters like Mr O’Comartuin to rack up such huge debts. Traders had to put up only £1 of margin payment for every £100 of risk on the Swissie, although IG – along with other firms – has since increased margin rates.
Meanwhile, IG isn’t going to let those debts go. Its chief executive, Tim Howkins, said: “We’ve got no interest in pursuing through the courts or bankrupting somebody who just clearly can’t pay, but equally we’re not going to let people off where they have got some ability to pay some of the debt. It is a balance between being considerate to clients and what our shareholders want.”
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Casualties From Swiss Shock Spread From New York to New Zealand
January 15, 2015, 11:20 PM UTC Updated on January 16, 2015, 7:22 AM UTC

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Losses mounted from the Swiss currency shock as the largest U.S. retail foreign-exchange brokerage said client debts threatened its compliance with capital rules and a New Zealand-based dealer went out of business.
FXCM Inc., which handled a record $1.4 trillion of trades by individuals last quarter, said clients owe $225 million on their accounts after the Swiss National Bank’s decision to abandon the franc’s cap against the euro roiled markets worldwide. Global Brokers NZ Ltd. said losses from the franc’s surge are forcing it to shut down. IG Group Holdings Plc estimated an impact of as much as 30 million British pounds ($45.5 million) and Swissquote Group Holdings SA set aside 25 million francs ($28.4 million).

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Swiss Franc Spread Betting Losses

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