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The Aftermath of the SNB Cluster Bomb on the Swiss Franc – One More Turkey Trade Meets Its Calling


The massive move in the Swiss Franc versus the Euro has claimed its early victims. On Thursday, the Swiss National Bank (SNB) suddenly removed its four-year peg of 1.2 to the Euro. The Franc went up to 0.85 to the Euro and later, settled at 1.04.

How did the SNB do it? If someone wanted to sell the EURO to buy the CHF, or the EURCHF pair (the trading pair of 1 euro versus the Swiss Franc, whose symbol is the CHF) the SNB would go buy it at 1.2. Since the SNB can print CHF, it can endlessly buy the Euro if the other side wanted to sell. The SNB wanted to do it so their exports remained competitive against the EUro.

This has hurt leveraged players in the FX space. It was a turkey trade – if the SNB was protecting the 1.2 peg, then you never had to worry about, say, a 1.1 put option working in the favour of the buyer. So for four years, traders wrote puts on the EURCHF thinking it couldn’t go below 1.2. The leverage of FX (of 30 times) meant that just 3% of a move against you would slaughter your capital. And guess what, that one day, a 40% move destroyed it. A broker would probably take $3 for every $100 bet as margin, which means that a $20 loss is $17 more than the broker has – and clients, in such circumstances, just vanish.

A massive US FX broker, FXCM, announced that the move wiped out its equity and left a $225 million negative balance on such defaults. It had to be rescued with a $300 million loan:

Shares of FXCM, one of the largest retail currency brokers in the world, were suspended on the New York Stock Exchange on Friday after the company said client losses on Swiss franc trades threatened to put it in violation of regulatory capital rules.

The two-year loan, with an initial interest rate of 10%, is “designed to maintain FXCM’s financial strength and allow it to prosper going forward, ” said Leucadia Chief Executive Richard Handler.

There were more: Interactive Brokers, a large brokerage, announced about $120 million of losses, 2.5% of it’s net worth:

Due to the sudden move in the value of the Swiss Franc (“CHF”) yesterday, several of our customers suffered losses in excess of their deposit with us. Such debits amount to approximately $120 million, less than 2.5% of our net worth.

UK Based IG group saw $46 million of losses, and will announce results on Tuesday. New Zealand brokers Excel Markets and Global Markets NZ shut down too.

Hedge funds too suffered. Everest Capital LLC is closing its largest fund which had $830 million in assets as of December 2014.

Marko Dimitrijevic, who founded Everest Capital LLC in 1990, will close his company’s largest fund due to losses associated with massive movements in the currency market after the Swiss National Bank’s unexpected announcement Thursday that it was abandoning its policy of pegging the exchange rate at 1.20 Swiss francs per €1.00, according to a person familiar with the firm cited by Bloomberg News.

This is still early, and we will see knock on effects later. Already Swiss stocks are down 15% in two days. Swiss exporters, like watchmakers, cement makers and food giants will hurt with the Swiss franc move – and the four years of low volatility (or “no” volatility) would have made them complacent enough to not hedge.

The turkey trade involves fattening the turkey which thinks its food supply is endless until one day, it *is* the food. Thursday was chomp-chomp day for many brokers – but many others will follow, as global macro event evolve. We’ll watch closely.


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