2 FX Brokers Suffer "Significant Losses" After SNB Surprise, "In Breach Of Regulatory | Reviews of Brokers and Data Feeds

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2 FX Brokers Suffer "Significant Losses" After SNB Surprise, "In Breach Of Regulatory

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Market Wizard
Berlin, Europe
Trading Experience: Advanced
Platform: NinjaTrader, MultiCharts
Broker/Data: Interactive Brokers
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Posts: 9,794 since Mar 2010
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Irresponsible Central Bank and Excessive Leverage

The problem here is leverage. FX brokers are competing against each others for customers and allowing for leverage of up to 1:500, see list here


This leverage is ridiculous. Let us assume that a majority of the customers were short the Swiss Franc and that the broker took the opposite position long the Swiss Franc. The broker would further enter a short position with banks to reduce exposure. After the sudden move of 2,500 pips many customers could not meet the requirements and their accounts would be liquidated. The broker is left with a net short position from the hedging which was done to neutralize customers positions.

The hedging was necessary in case that the Swiss Franc would drop, as it did during the last months when it was linked to the Euro. The point here is that the broker is exposed whether hedged or not. If the broker does not hedge, he loses big when the Swiss Franc drops. If he hedges he loses big when the Swiss Franc rises, because retail customers cannot meet their margin requirements.

As usual leverage is the problem. US citizens are only allowed to use a maximum leverage of 1:50. This is good but not good enough, as it only covers losses from a 2% move of any currency. Not enough protection, if a central bank goes mad and triggers a currency move of 20%. I think that the behaviour of the Swiss Central Bank was irresponsible.

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