A Black Swan is not an elephant in the room – One year on from the SNB ‘Black Thursday’

By Yael, Warman, Leverate. January 15th, 2015, a day like any other day, people set out to work, kids were sent to school, banks opened for business, traders managed their portfolios, and then, with no preamble whatsoever, a G5 bank broke a promise that unleashed a series of events that culminated in the bust of […]

Swiss black swan

By Yael, Warman, Leverate.

January 15th, 2015, a day like any other day, people set out to work, kids were sent to school, banks opened for business, traders managed their portfolios, and then, with no preamble whatsoever, a G5 bank broke a promise that unleashed a series of events that culminated in the bust of brokerages around the world and hundreds of millions of dollars in losses.

On this Thursday, exactly one year ago, the Swiss National Bank removed its cap that promised that 1 euro could buy no less than 1.2 Swiss francs and in an instant, shock waves were felt through the financial markets across the globe.

Forex traders were hit the worst because of their ability to leverage significantly. Trusting that the Swiss National Bank would not change its policy, traders assumed that a declining euro would not allow the trade to fall under 1.2, but when the cap was removed, all hell broke loose.

This unforeseen, single event, led to the exposure to negative balances of some of the world’s largest FX brokerages and caused some of the biggest banks to lose obscene amounts of money.

They say hindsight is 20/20, however, in the case of Black Swan events, such as this one, the rarity of it all prevents us from seeing clearly, even after the fact, what signs were present that led to this financial mess. Having said that though, a lot has changed as lessons from this were learnt. According to Leverate’s Chief of Staff, Sami Mana, market conditions after the Swiss franc crash, started to paint a much more conservative picture.

“Leverage conditions became stricter, companies began taking bigger and better measures to asses and manage risk, higher margin requirements were implemented, spreads became wider and most importantly, brokerages realized the importance of a strong liquidity provider and no longer were willing to accept lower tiers of liquidity – Sami Mana, Chief of Staff, Leverate.

Unfortunately however, short memory is a trait we see too often and we are beginning to see leverage becoming a bit looser, spreads becoming tighter, and everyone getting a bit more comfortable with risk once again. Sami Mana advises, that for brokers to survive, even under the most unpredictable circumstances, we must keep our pulse on the market and keep the lessons we have learned present.

So to remind us all of the lessons we learned from the SNB event, Mr Mana suggests first and foremost, to not be fooled into thinking that you can rely 100% upon analysis of the past in order to predict the future. Brokerages and traders alike should watch carefully for signals that a previously solid trend is coming to an end, hedge effectively and place leverage accurately.

Brokers in particularly should have a dedicated individual who can take immediate action if needed and who must remain vigilant regarding high-volume, high-volatility instruments, track and compensate for swings, and establish a habit of effective hedging.

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