The 15th of January saw the SNB (Swiss National Bank) remove the floor on the EUR/CHF rate leaving it to freely float in the market. Immediately, the Swiss Franc quickly increased in value by nearly 20%. This caught most forex traders and market participants by surprise both on the degree of the business reactions and timing. Throughout the following days, it became evident that numerous forex exchange operators, with exceedingly leveraged positions trading on margin, had significant losing positions most of them having been caught unawares with this news. The unique arrangement of the online leverage FX business model hurls some interesting insights. The question is—why did most brokers still prove strong and stable during this period?
The stun move from the Swiss National Bank essentially affected foreign exchange trade as well as foreign exchange brokers. At the end of the day, such events are tests for broker strength and stability. Here is how brokers’ reactions rounded up during that period and why most of them were still proved stable and strong during the period. The greatest stories are the bailout of FXCM and insolvency of Alpari UK. There are a few brokers that incurred losses but the vast majority of foreign brokers that had CHF exchanging still suspended possibilities of any negative effects saying "nothing much, just business as usual".
“Nothing much to expect,” said some big brokers such as Avatrade. Most of these brokers were able to withstand the event for having anticipated the possibility of such an event. Arguably, some brokers still say this was slightly predictable and were therefore able to act in advance. Therefore, for most brokers this was not something to be afraid of. Thus these brokers chose at the time to boost the margin needed on their CHF pairs by multiples. Thanks to such measures, most foreign traders were saved which substantially limited any negative effect of that decision.
Obviously, there are foreign brokers out there with very strong financial positions to be shaken by such events. Therefore, for such brokers there was no cause for worry. One such good example is Avatrade which sent a message to its clients saying, “We are stronger and more stable.” In addition, several other foreign brokers were confident to triumph thanks to stable risk management departments in their respective companies which were ready to take on the situation head-on. Later, such brokers boasted of no client losses and full stability. Other companies that faced meager losses were quick to react to the event therefore promising not to ask their clients for any reimbursements. “With a big margin, we do not expect major problems,” said Ironfx.
One other factor that spelt confidence in most foreign brokers is the fact that their predictions on the total potential losses amounted to less that 1% of their organization’s capital. One such example is eToro. At the end of the day, only the company’s funds were slightly affected. This is probably because this company keeps their client’s funds in special accounts separate from those of the company.
Numerous brokers still remained untouched due to a variety of reasons and were therefore strong and stable to face the outcome. Whether it’s their preparedness to handle such instances or just issues with luck, these brokers were ready to handle the outcome. For instance, Dukascopy clients remained calm because their company had previously made a decision to reduce their leverage limit on CHF pairs to less than 2%. This means that, if there was any exposure to losses, it would be effectively risk managed. For organizations such as Alpari and Excel, they had recently increased their leverage to 1:500 and 1:400 respectively, a reason why they were badly hit. With such advance steps, the vast majority of brokers were not afraid of any major negative impacts, if any.
A company such as XM and several others still continued to possess strong business ethics and balance sheets amidst the fear of potential losses. Others continued to hold their capital in excess of all the ASIC standards, confirming that trading on all the CHF was still “close only.” Companies such as Swissquote still hoped to retain solid capital buffers even after that provision. This means that their overall impact including potential bad debts would not impact the group. Most brokers continued to have strong balance sheets and business models. They still remained on course to even surpass their previous performances!
#xmbr300x250#While some other brokers incurred losses, the vast majority were in fact trading profits. One such perfect example is Plus500 - CFD's provider *Your capital is at risk. Their clients felt more stable thanks to the robustness of their modern risk management policies and measures. Still, some brokers quickly suspended trading on CHF due to the sudden market situation. Upon SNB’s move to remove the 1.200 floor, most brokers acted immediately to introduce more rigorous trading terms such as increased margin calls. “Only holding capital well in excess of the ASCI regulatory standards would save you,” said Pepperstone.
In short, strong risk management systems, keen market study and advance market prediction kept the fear of losses at bay for most brokers despite the looming bad losses. Also proper negative balance protection coupled with guaranteed stop losses saw most brokers triumph over SNB’s callous CHF cap removal decision. While such events are by large unpredictable, in this modern age, there is an increased attention of businesses towards client security including full compliance with regulatory authority requirements and client segregated funds. With negative balance protection and stop losses, a company such as Plus500 - CFD's provider *Your capital is at risk was able to avoid incurring bad losses. Furthermore, UFX went further to enhance the strength and credibility with simply wiping negative balances of their clients, turning the event into a “no hassle for our clients”.
At the end of the day, what matters is happy clients busy trading the trend. Most businesses cover losses using the capital it places as collateral with its liquidity providers as well as prime brokers. This is one of the greatest responsibilities of a company in protecting their clients’ funds. The decision came, took its course but at the end of the day, most brokers continue to prevail and it’s therefore a reason to begin thinking positively, study the market and act wisely before any such occurrences re-emerges, perhaps from a different direction this time round!