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CHF Trading:
The past, the present, and the future
10th Jordan Forex Expo & Awards
Antypas Asfour, CFA, CMT, PRM, IFQ | Portfolio Management Officer
© 2006-2015 FxPro Financial Services Ltd
Disclaimer
This material is considered as a marketing communication and does not contain and should not be construed
as containing investment advice or an investment recommendation, or, an offer of or solicitation for any
transactions in financial instruments. Past performance does not guarantee or predict future performance.
FxPro does not take into account your personal investment objectives or financial situation and makes no
representation, and assumes no liability to the accuracy or completeness of the information provided, nor for
any loss arising from any investment based on a recommendation, forecast or other information supplied from
any employee of FxPro, third party, or otherwise. This material has not been prepared in accordance with
legal requirements promoting the independence of investment research, and it is not subject to any
prohibition on dealing ahead of the dissemination of investment research. All expressions of opinion are
subject to change without notice. Any opinions made may be personal to the author and may not reflect the
opinions of FxPro. This communication must not be reproduced or further distributed without prior permission
of FxPro.
Risk Warning: CFDs, which are leveraged products, incur a high level of risk and can result in the loss of all
your invested capital. Therefore, CFDs may not be suitable for all investors. You should not risk more than
you are prepared to lose. Before deciding to trade, please ensure you understand the risks involved and take
into account your level of experience. Seek independent advice if necessary.
CHF Trading: The past, the present, and the future
© 2006-2012 FxPro Financial Services Ltd
Introduction
Deciphering the CHF moves;
• Why did the Swiss National Bank place a floor on EURCHF?
• Why did the SNB remove its floor?
• What were the consequences of the floor removal?
• What lessons can be learnt from the CHF event?
CHF Trading: The past, the present, and the future
Trading CFDs involves high risk of loss
3
Definition
What is a currency floor?
The lowest price at which one currency can be exchanged for
another.
The 1.20 EUR/CHF floor instituted by the Swiss National Bank
on September 6, 2011 meant that 1 euro could not buy less
than 1.20 Swiss francs.
CHF Trading: The past, the present, and the future
Trading CFDs involves high risk of loss
4
Background
Why did the Swiss National Bank place a floor on EURCHF?
• Overvalued Swiss franc on the back of an economic
slowdown in the Eurozone and as an EU sovereign crisis
was unfolding
• Overvalued franc posed a threat to the Swiss economy
• Deflationary risk
CHF Trading: The past, the present, and the future
Trading CFDs involves high risk of loss
5
SNB Statement
Source: Swiss National Bank Press Release, 6 September 2011
CHF Trading: The past, the present, and the future
Trading CFDs involves high risk of loss
6
Price Action – SNB intervention
Source: Bloomberg
CHF Trading: The past, the present, and the future
Trading CFDs involves high risk of loss
7
Price Action – Low volatility
Source: Bloomberg
CHF Trading: The past, the present, and the future
Trading CFDs involves high risk of loss
8
Price Action – Floor removal
Source: Bloomberg
CHF Trading: The past, the present, and the future
Trading CFDs involves high risk of loss
9
Price Action – USDCHF
Source: Bloomberg
CHF Trading: The past, the present, and the future
Trading CFDs involves high risk of loss
10
Action
Why did the Swiss National Bank remove its floor?
• Not a sustainable policy, especially as the European Central
Bank was preparing to announce its own Quantitative
Easing
• Less of a need given the US dollar’s appreciation
• Ballooned balance sheet with 0.5 trillion francs of foreign
currencies (75% of GDP)
CHF Trading: The past, the present, and the future
Trading CFDs involves high risk of loss
11
Central Bank Size
Central Bank Assets as a % of GDP
80%
70%
60%
50%
40%
30%
20%
10%
0%
European Central
Bank
Bank of England
Federal Reserve
Swiss National Bank
Bank of Japan
Bank of Canada
Source: ECB, BoE, Federal Reserve, SNB, BoJ, BoC, World Bank (2014)
CHF Trading: The past, the present, and the future
Trading CFDs involves high risk of loss
12
Could it have been predicted?
Was the writing on the wall?
• The ECB was expected to announce the following week a
fully fledged asset-buying programme that would exert more
pressure on the SNB’s balance sheet – the SNB would
likely be a loser in a currency war with the ECB
But the SNB re-iterated on January 12, 2005:
• “…we are convinced that the minimum exchange rate must
remain the cornerstone of our monetary policy," Jean-Pierre
Danthine, Vice President of the SNB
CHF Trading: The past, the present, and the future
Trading CFDs involves high risk of loss
13
Could it have been predicted?
An end to the SNB’s policy could only have ended messy;
• “The decision has been a surprise for markets -- you can’t
do it in any other way,” SNB President Jordan, January 15,
2015.
Source: MT4 Account Statement (2015)
CHF Trading: The past, the present, and the future
Trading CFDs involves high risk of loss
14
Reasons for the flash-crash
Factors contributing to the market havoc;
• Algorithms were triggering stop losses below the 1.2000
floor
• Long traders were receiving margin calls and stop outs with
positions getting closed
• Liquidity providers withdrew liquidity, making the market at
absurd quotes
• Run to havens spiked volatility with risky assets taking big
hits
CHF Trading: The past, the present, and the future
Trading CFDs involves high risk of loss
15
Impact of the floor removal
Major hedge funds incurred immense losses;
• Everest Capital's Global Fund closed after losing almost all
of its $830 million in assets
• COMAC, a London-based global macro shop, lost 8% on its
CHF trading
• Harness Macro Currency Strategy, a hedge fund which
manages more than $750 million, lost 8.8% in January
• Fortress Investment Group's macro hedge fund lost 7.64%
the week the floor was removed
Source: Reuters, Bloomberg (online, 2015)
CHF Trading: The past, the present, and the future
Trading CFDs involves high risk of loss
16
Impact of the floor removal
Major Forex brokers incurred large losses;
Broker
Impact
Loss ($mln)
Alpari UK
Placed in
Administration
IG
Losses
45
Interactive Brokers
Losses
120
FXCM
Bailed out by
Leucadia National
225
Excel Markets
Insolvency
Source: Reuters, Bloomberg (online, 2015)
CHF Trading: The past, the present, and the future
Trading CFDs involves high risk of loss
17
Impact on FxPro
Although the firm incurred some losses, FxPro has emerged
stronger;
• 03.02.2015: Highest Number of Trades Executed - 199.397
(59% increase from previous high)
• 03.02.2015: Highest Volume Traded ever
Year On Year January 2014 vs January 2015
• Client Registrations: New Real Accounts are up 152%
• Trading Volumes: Number of Trades are up by 80%
CHF Trading: The past, the present, and the future
Trading CFDs involves high risk of loss
18
Reasons for the Success
Contributing factors for FxPro’s growth during the industry’s
most turbulent times;
• Abided by its Negative Balance Protection following client
losses and still maintains this protection
• Reduced spreads to the firm’s lowest ever
• Facilitated broker-to-broker transfers
CHF Trading: The past, the present, and the future
Trading CFDs involves high risk of loss
19
Lessons to Learn
With regard to currency pegs and central bank rhetoric;
• Currency pegs are placed for economic purposes – once
they cease fulfilling their usefulness or become
unsustainable they are scrapped, giving rise to a market
“shock”
• Credibility of the central bank of a developed economy got
questioned; raises the question how much can central bank
rhetoric be trusted?
CHF Trading: The past, the present, and the future
Trading CFDs involves high risk of loss
20
Lessons to Learn
With regard to FX companies and regulators;
• Better risk management policies and exposure monitoring
systems need to be implemented by firms
• FX firms and regulators should look at conducting stress
tests and scenario analyses
• Limits on leveraging could reduce one-sided exposures
• More stringent suitability tests for client acquisition
• Less deceptive advertising and dubious marketing practices
• Clients need to become more and better educated on
trading and risk
CHF Trading: The past, the present, and the future
Trading CFDs involves high risk of loss
21
Lessons to Learn
With regard to traders;
• There is no free lunch; any form of trading or investing
entails risk
• Whatever goes up can go down; need to assess alternative
scenarios
• Loss management; stop losses can help limit the cost of
bad trades
• More leverage is not necessarily better; overleveraging can
magnify the size and speed of losses
CHF Trading: The past, the present, and the future
Trading CFDs involves high risk of loss
22
CHF Trading:
The past, the present, and the future
10th Jordan Forex Expo & Awards
Antypas Asfour, CFA, CMT, PRM, IFQ | Portfolio Management Officer
© 2006-2015 FxPro Financial Services Ltd