Friday, January 16, 2015

What the Swiss National Bank did yesterday was nothing short of financial terrorism. FXCM blown out!

The fallout is starting to pour in...

It's bad enough when the banks and traders of Wall Street are left to blow up our financial system with their irresponsible behavior, but central banks are created and tasked to prevent unecessary bankruptcies and insolvencies.

I guess the Swiss National Bank doesn't think so. Their action yesterday--the abrupt and untelegraphed end to their euro/swiss peg--was nothing short of financial terrorism. The result is that now we see entire, healthy, viable, firms have been blown up. FXCM has been blown up and there are reports of many other firms starting to trickle it.

FXCM was a true success story. Founded by four young entrepreneurs they built the biggest U.S. retail forex firm. It is now destroyed and seeking a rescue thanks to the SNB.

Wall Street has done a lot to shatter the confidence of investors over the year, but a central bank??? It's pretty much time to take your chips and walk away from the table for good.

26 comments:

Ryan Harris said...

Alpari UK too. Been following all morning, absolutely stunning, I thought the little guys would fold first. But all the regulated brokers are going first. Probably more to come.

Malmo's Ghost said...

Is there a definitive explanation for why the SNB did this?

mike norman said...

No.

Malmo's Ghost said...

If the SNB telegraphed that the peg was going to be dropped, say, two months going forward would the carnage have been any more orderly?

Also, I'm not sure why a weaker QE driven Euro would matter to the Swiss?

Ryan Harris said...

The SNB could have lifted the cap slowly, or done like the chinese and created larger and larger ranges until a BoP equillibrium is found. Most importantly they could have acted when London and New York were both open so there was more liquidity in the markets.

Interactive brokers is reporting that they lost $120 million but are OK. Only 2.5% of their capital.

mike norman said...

Should be viewed as a pariah now. Deserved.

Matt Franko said...

Maybe they thought they were "out of money!"... or were going "cash flow negative" in CHF....

CBs need to use portfolio income to fund their operations....

They are "Factors":

http://en.wikipedia.org/wiki/Factoring_(finance)

they dont run off govt appropriations...

It MAY (have to look into it) be that they thought they were going to "run out of money".... or go to "negative equity" or something ... (to them this would be "bankrupt")

Have to examine the SNB "balance sheet" to look at assets and liabilities and in terms of the specific currencies they deal with... CHF cash flow needs, etc...

Might have been able to predict this...

Matt Franko said...

Ryan did the SNB pay IOR over there?

Dan Kervick said...

The Swiss economy consists of more than just currency traders.

Malmo's Ghost said...

How much of the Swiss economy is dollar denominated?

NeilW said...

Perhaps the actions of the SNB were designed specifically to knock over those hedging positions in CHF to get them to go play on somebody else's patch of grass.

It's important to remember that the Central Banks are not there to help speculators or currency trading firms playing liquidity games.

SNB were fed up with people using the CHF as a safe haven. If they've upset some people so they 'leave' then that is entirely what the Swiss appear to want.

Perhaps there has been a policy shift towards domestic consumption in Switzerland.

More likely the SNB has had a serious attack of neo-liberalism and is worried about 'losses' on all those Euros it has buried ever to see the light of day again.

Malmo's Ghost said...

Maybe a better question is how much of the Swiss economy is export driven?

Ryan Harris said...

Matt,
I believe they had a negative deposit rate on excess reserves beyond a certain threshold. They use different terminology, I think they are called sight deposits or something.

http://www.ft.com/fastft/253291/swiss-central-bank-moves-negative-deposit-rate

Dan,
The swiss economy is more than traders but the SNB is charged with "the oversight of payment and securities settlement systems" which doesn't usually include bankrupting members and dealers intentionally. Dealers playing by the rules set by the CB were destroyed by the CB's actions. That is contrary to their CB's legal remit.

Malmo,
I'm not sure how much is dollar denominated, but there were lines of people this morning trying to covert their Euro deposits to swiss francs.

Neil,

"It's important to remember that the Central Banks are not there to help speculators or currency trading firms playing liquidity games. "

The CBs are there to ensure banks and citizens have a functional payment system that is fair and orderly. The rates and pegs are all about providing liquidity according to the rules.

Ryan Harris said...

The losses weren't limited to retail brokers, Citi, Deutsche bank, Barclays and Interactive Brokers combined lost about a half billion dollars.

Deutsche's interbank fx system has been widely reported to have froze up and caused many, many problems.

Matt Franko said...

Interesting article here Ryan:

http://www.bloomberg.com/news/2015-01-09/snb-sees-2014-profit-of-38-billion-francs-resumes-dividend.html

Says they "made 38B" last year.... looks like almost all of it from their USD holdings gaining on the CHF.... (this is how they "make money"???)

BUT, says they "lost" 9B in 2013.....

"After failing to receive money for 2013, cantonal budget chiefs earlier this month urged the SNB to give them more money for 2014 to offset shortfalls in revenue from other sources."

If the CB kept buying Euros (with negative yield), then they would have really been "losing money"....

Still dont see some sort of "show stopper".... other than maybe the cantons were really putting pressure on them to pay higher dividends...

So with the negative rates, they will "make money" from Swiss deposits which I guess they can use for paying the system higher dividends....

Still dont see the direct connection for them to "have to" stop the peg in order to set neg rates...

Negative rates makes sense as now they will have excess CHF balances as "profits".... but dont see the connection between establishing the negative rates and stopping the peg... dont see how one was dependent on the other.... or how the two could have been mutually exclusive...

Maybe if the neg rates they needed on CHF balances were "more negative" than the ECB charged, then they would fear people getting out of CHF and into Euro... which then they would lose their revenue base as the revenue base is in CHF deposits...

Ryan Harris said...
This comment has been removed by the author.
Greg said...

"The CBs are there to ensure banks and citizens have a functional payment system that is fair and orderly. The rates and pegs are all about providing liquidity according to the rules."


That is true but Im with Neil in that I think too much "economic activity" is really no more than casino activity. Most CBs ARE interested in affecting real output not just gambling games. These currency traders are not adding anything to our real output. Its not really any different than a bunch of meteorologists making large bets on temperature changes.

Its a tough situation. We have let this go on for so long that this type of action is really a huge slap in the face. But I think its a face that needed slapping.

Gonna be interesting

Dan Kervick said...

Ryan, the fact that some speculators and arbitrageurs go out of business, and some banks lose money, doesn't mean that the financial system has been destabilized. It is not the job of central banks to make money for currency investors.

David Munro said...

Fixed or narrowly floating currencies and those with floors or ceilings are risky. Any asset or liability that is disallowed at least a moderate level of price discovery is risky and becomes increasingly so the longer its (relatively) free float is disallowed. Restricted-range currencies appear non-risky and those who make prices (brokers) offer significant leverage and those who take prices (traders) take advantage of this leverage. If the fix remains in place, all are happy (except the fixer). If the fix breaks, all suffer (except the fixer).
I traded fixed/minimally floating currencies in the early 90’s with a major Swiss Bank and we routinely bought tiny delta (significantly out-of-the-money) options to benefit from an eventual move to floating. Worked well with the Italian Lire. I ran a Japanese dealing room in the late 90’s early 00’s and we executed the same hedging strategy with success as Asian fixes fell away.
As a wise broker once said, “If it ain’t fixed, broke it.” The corollary, if it’s fixed, don’t broke it, would have been a wise advice for the currency brokers. Or at least broke it and promote trading but with significantly reduced margin. And of course the brokers also plead “If it’s broked, don’t fix it.”
Stop blaming the SNB for not adhering to their guidance. If you want to trade fixed or floored currencies, be responsible and hedge yourself. If you want to broke them, offer reduced margin.

Matt Franko said...

http://www.snb.ch/en/ifor/public/qas/id/qas_eigenkapital#t6

"IS IT POSSIBLE THAT NO DIVIDEND IS PAID?

Dividends are paid on condition that a distributable profit is available. In the 2013 financial year, this was not the case. Therefore, for the first time in its history, the SNB did not pay a dividend."

so I can see how the negative rates would correct this, ie, the SNB will "make a profit" this year as they are charging 0.75% on approx 500Bfranc reserves... or 3.75B francs "profits" this year..

But why eliminate the peg?

Without the peg, seems like the swiss exporters will just leave the surplus in either Euros or USDs... and not be able to anymore change out these surpluses into the swiss banks for francs at the guaranteed 1.2 rate....

so they wanted to have "profits" to be able to pay dividends this year, so they charge the deposit fee to "make profits"...that I get.... but why drop the peg?

Seems like with the peg, they would build more franc reserves they could charge the .75% deposit fee on this would increase their "profits"...

Matt Franko said...

http://www.snb.ch/en/ifor/public/qas/id/qas_eigenkapital#t17

"WHAT THEN DOES THE SNB NEED EQUITY CAPITAL FOR?


If a central bank's equity capital were negative over a long period of time, it could lose credibility in the markets, and, in extremis, no longer be in a position to fulfil its monetary policy mandate without restriction. Building up equity capital again after suffering losses would therefore be a prime concern of the SNB. The National Bank generally strives to maintain a strong equity capital base in order to be able to fulfil its mandate in the long term."

Ignacio said...

ROLF! Negative equity in CB, who cares!!! You were right Matt, world run by morons everywhere haha.

If you think this is financial terrorism (I've little sympathy for the idiots playing games with money they neither own or have in the overleveraged ponzi casino financial market specially on risky positions like those), wait until this hits the export industry in Switzerland, which is even more export-dependant than Germany and been exporting deflation for decades.

This all in the neoliberal dominated world of gold-bugs, which won't take this as an opportunity but will use this to drive more barbarian style 'free market' policies. Lack of control increasing on a daily basis right now worldwide.

Matt Franko said...

I,

Its like I'm chained to a bench in front of the chimpanzee cage at the zoo ... ;)

Maybe the way to have played this would have been to monitor their "capital" or "equity" level and once that went negative it was just a matter of time..

Conversely, now maybe assume that they will go back to a peg once they have "build up equity capital"... to again support the exporters...

But this might take a long time with Europe in austerity mode now...

I think what will probably happen short term is the exporters will lower their prices to maintain market shares.... this should weaken the CHF.. this result will be a reduction in the REAL terms for swiss rather than before with the peg it was a reduction in FINANCIAL terms for the SNB (went to neg equity.... )...

They seem to be flip flopping between a policy of helping exporters and screwing bankers vs helping bankers and screwing exporters...

Taking turns ... rsp

Matt Franko said...

I,

(to them) if they have a "loss" then they cannot "pay themselves"...

To be able to "pay themselves" then they must have some sort of "profit" to be able to point to... in the accounting... double entry...

So they are going into a mode where they think they will end up the year with a "profit" so they can "pay themselves"...

non-bank sector is going to have a rough year... like the Swatch guy laments above... they are going to have to drop prices in Euro/USD terms...

This should weaken the CHF back towards the 1.20... then when Europe recovers, they will start to be able to raise prices in Euro again, this will strengthen the CHF back down to 1.00 ... to a point where the SNB, having "built up equity capital", will intervene again to help them by pegging again at 1.2.... etc....

This will happen over a longer term... not short term...

rsp

NeilW said...

"Without the peg, seems like the swiss exporters will just leave the surplus in either Euros or USDs"

Swiss exporters need CHF to pay staff, so they have to get that from somewhere or trading is pointless.

Sellers need to sell, so they will bend over backward to take the customer's money. Generally you back that off to the bank via the Visa system - unless the orders are very large.

That continues until the multinational banks have enough of their assets in Switzerland and hit their internal risk limits.

The process is something like this

Read EUR for Scottish Pounds and CHF for British Pounds.

The Rombach Report said...

The extreme move in CHF has caused a big adjustment in the US$ Index spot/future basis relationship despite CHF having only a 3.6% weighting in the DXY as a whole. Despite ZIRP or near ZIRP for all of of the component currencies of the DXY, the March future (DXH5) has ballooned to a closing premium of .37 on Friday ( DXH5 92.89 minus DXY 92.52 ) from just .24 at the close on Wednesday. The push up in the spot/future basis reflects embedded optionality in the DX future contract which gives it an upward bias that is driven by volatility.