Black Thursday: How SNB stumbled Forex Market 2015.01.16

Of-late global financial market have been facing one of the most uncertain times where investors have been taken by surprise by some unexpected central bank actions. One such event, already called Black Friday happened on Thursday when the Swiss National Bank (SNB) took a U-turn to abolish its three-year-old policy to cap the Swiss Franc (CHF) at 1.2000 against the Euro (EUR). SNB also pushed the interest rate on sight deposits to -0.75% from -0.25%.

SNB's status as a financial haven seems to have played a BIG role behind this move under current uncertainty over Europe and Russia wherein many entities would have tried to park their funds to the safer places.

The decision triggered exceptional volatility, strengthening CHF as much as 41% against EUR and pushing USDCHF down by 38%. The EURCHF which tested 0.9711 level from its 1.2010 price mark, ahead of decision, is witnessing a minor pullback to 1.0091 level with over 4% gains at present.

The turmoil caught everybody by surprise, significantly impacting the Forex market. Several brokers were forced to freeze trading in CHF pairs due to lack of price quotes from their liquidity providers. This could have resulted into billions of dollars of losses for foreign exchange brokers and their customers. Clients suffered losses that exceeded their account equity, creating a negative balance, which in many regulated markets is to be paid by the broker.

The IG group was the first to come out to announce that they might have to face losses to the tune of £30 million. FXCM also stated that they were hit by a massive $225 million losses due to the volatility in the Swiss franc., Alpari, Saxo Bank, FXCC, Ayondo, FxPro, Exness and FXDD are some other brokers that ceased trading in CHF pairs and informed their clients regarding the position.

Such fierce move caused the Alpari UK to enter into insolvency while a Zealand based currency brokerage firm, Global Brokers NZ, trading as Excel Markets, said that it had sustained a total loss of capital and no longer met regulatory capital requirements, which might force them to shutting-down the business. MTrading has not been affected by these events and conducts business as usual. Clients, who have had positions in CHF-related instruments at the time of the event are unable to withdraw funds due to the possible adjustments of the transactions. The update on that will follow shortly.

This could just be the tip of an iceberg. The Swiss franc bomb thrown on the currency markets might have caused major financial damage across the industry. Traders operating in a market, which is majorly driven by central bank actions, cannot be prepared for such unprecedented events but strict adherence to risk management strategies could help avoiding such massive losses.