Massive loss in trading of CHF

On January 15, 2015 09:30 GMT, the Swiss National Bank gave up its commitment to defend a

EUR/CHF floor of 1.20, the exchange rate of EUR/CHF dropped below 1.20 [1]. Investors selling CHF

(and buying EUR or other currencies) at Saxobank exited their position after stop sell orders were

filled or in an automatic forced exit once their margin fell below of requirement.

Despite its clients saw their short CHF positions exited on their trading platforms with email

notifications (for the case of margin stopped-out), 12 hours later, Saxobank announced to change

the price of the filled orders according to two time frames. [2]

1. For executed fills that occurred between the times of 09:30:00 to 09:41:30, a EURCHF price

of 0.9625 is applied, and for executed fills that occurred between the times of 09:41:30 to

10:01:00, a EURCHF price of 0.88 is applied.

2. For CHF pairs other than EURCHF, the rate is calculated from the EUR exchange rate and the

currency.

3. For FX options executed, Saxobank amended the option price based on the new spot

reference and observed volatility surfaces.

Since the EURCHF prices of 0.9625 and 0.88 were lower than the prices Saxobank quoted on its

trading platform to clients for order execution after the Swiss National Bank announcement, the

amended prices resulted in worse transacted price for its clients exiting their short-CHF positions,

and as a result bigger losses to the clients.

On January 23, 2015, Saxobank reported that due mainly to negative client balances on which it may

not be able to collect, the bank may be forced to take a loss of up to DKK 700 million (about USD 107

million), which is about 26% of the total capital of Saxo Bank A/S. Taking the estimated maximum

loss into account, its capital would drop to DKK 1.97 billion. [3]

Complaint from clients on Saxobank amending deals

The CHF movements resulted in massive losses, in particular negative account balances, for many

retail investors in different FX brokers. However, the treatment in different brokerages was largely

different. [4] Major US brokerage FXCM forgave negative account balances of retail clients, which

represented 90% of the negative accounts and 40% of the total debit balances owed. [5] Some

brokerages such as Oanda, Dukascopy and Forex.com were among the major brokers which

announce forgiving clients’ negative balances.

As a comparison, Saxobank’s action of amending deals forcing larger negative balances of clients

resulted in complaints. [6] Besides heated discussions seen over forums such as forexfactory.com

and elitetrader.com, some clients formed groups such as “Saxobank Cheated Users Group” to

prepare for legal action against Saxobank. And Denmark-based Andersen Partners is one of the law

firms known to represent clients against Saxobank in a class action.

A Vienna-based company, Censeo Asset Management, offered its clients a Saxo-brokered franc

product which resulted losses. It announced that it cannot recognize the lawfulness of Saxobank’s

action and would help its clients challenging Saxo’s repricing.

On January 29, 2015, the Danish Financial Supervisory Authority said in a statement that it is in close

dialogue with Saxobank and will require the bank to provide a detailed report of the actions taken

during and after the incident. [7]

Saxobank’s role as a market maker

Unlike its brokerage business in equity and futures, which are exchange traded, Saxobank makes

prices on FX spot, forward and options and let clients to trade on the prices it quoted. On this basis,

Saxobank acts as a principal (and not an agent) to the clients and deals done were considered final

once the transactions were completed. Without clients’ consent, amending the prices of

transactions done caused a lot of controversy.

Saxobank’s CFO and Head of Risk said in an interview, “It’s not unlikely that we’ll face legal

challenges”. [8]

Note:

1. Swiss National Bank discontinues minimum exchange rate and lowers interest rate to -0.75%,

http://www.snb.ch/en/mmr/reference/pre_20150115/source/pre_20150115.en.pdf

2. Saxobank’s email to clients,

http://www.alta.si/Content/Doc/ALTA_Invest/novice/saxo_obvestilo_EURCHF_2015-16-

01.pdf

3. Saxobank remains well capitalized despite losses, http://www.saxoworld.com/news/press-

releases/saxo-bank-perpetual-fixed-rate-resettable-additional-tier-1-capital-notes-the-notes

4. Brokers forgive negative balance following CHF crisis, http://forexmagnates.com/covered-

brokers-forgive-negative-balance-following-chf-crisis/

5. FXCM to forgive majority of clients who incurred negative balances,

http://ir.fxcm.com/releasedetail.cfm?ReleaseID=893269

6. Saxo bank takes hard line on clients’ currency losses, http://www.wsj.com/articles/danish-

bank-takes-hard-line-on-clients-currency-losses-1423432982

7. Saxo told to hand Franc-trade details to FSA amid complaints,

http://www.bloomberg.com/news/articles/2015-01-29/saxo-ordered-to-hand-franc-trade-

details-to-fsa-amid-complaints

8. Saxo faces legal battles with clients after Franc shock,

http://www.bloomberg.com/news/articles/2015-01-26/saxo-faces-legal-battles-as-clients-

told-to-cover-franc-losses