SNB Black Swan two years on: What the industry has to say
Exactly two years ago today, the entire FX markets were thrown into an unprecedented and unexpected turmoil as a result of the Swiss National Bank having removed the 1.20 peg on the EURCHF pair. Some survived, some didn’t, but it changed the entire modus operandi of the industry. We speak to senior industry leaders to see how they view it on the anniversary of the black swan
January 2015, 2015. What were you doing that fateful day? The winter rain pounded the streets of New York, London, Tel Aviv, Geneva, Sydney, Hong Kong and Singapore as the sudden and environment-changing news broke.
Switzerland’s national bank had suddenly removed its 1.20 peg on the EURCHF pair, creating a dramatic and unexpected wave of volatility into the currency markets.
Tier 1 banks, liquidity providers, retail brokerages and ancillary support firms were all exposed to the massive hole created by negative client balances that ensued, most of which were not collectible, and some companies weathered the storm with a large hit, others did not survive.
Some companies demonstrated remarkable corporate aplomb by rectifying the situation very quickly and heading straight back into the limelight.
Now, two years have passed, which in the electronic trading business is a veritable lifetime.
What has been achieved and what has been learned, and upon what can be reminisced?
FinanceFeeds spoke to three senior industry leaders in order to garner a comprehensive view.
Andrew Ralich, CEO of integration, liquidity management and MetaTrader bridge development company oneZero Financial Systems explained to FinanceFeeds “From a technology perspective, the SNB event was a catalyst to a massive change in brokers demands for creative solutions for credit, clearing and execution. As Tier 1 Prime Brokerages have tightened restrictions on both blanket credit worthiness and amount of credit provided, a void has grown in the PB and Prime of Prime space.”
“That void has been slowly filled by new non-bank participants. Two types of firms have lead the charge, first is those who have direct bank relationships as the result of strong balance sheets or through participation in other asset classes (for example, future brokers or hedge funds who previously did not utilize their available NOP and have reallocated some of their credit to FX B2B). Secondly, larger Retail brokers have also stepped, leveraging their existing liquidity relationships and credit facilities to evolve into B2B providers” continued Mr Ralich.
“In parallel, constricing margins across the board, due to the increased cost of clearing, are also forcing brokers to look into consolidating technology costs. This has been another key driver for business growth for firms like oneZero who offer hybrid retail/institutional platforms at a consolidated price point. It’s amazing to see this far from the event, but the dust has still not completely settled. I expect a further evolution in alternative clearing solutions, coupled with non-bank pricing to occur over the next 3-5 years as banks continue to distance themselves from the retail vertical in both clearing and liquidity provisioning” – Andrew Ralich, CEO, oneZero Financial Systems
Richard Elston, Head of Institutional at CMC Markets spoke to FinanceFeeds this morning, explaining “The Prime Broker model is a shadow of its former self – the number of banks playing in this space has contracted significantly and they have quite simply become a lot more selective over who they are willing to do business with. Internal risk management is the big driver here, although being a listed company with a multi-million dollar market capitalisation and a strong, publically reported balance sheet, certainly helped build our relationship with a range of providers over what has been a turbulent period.”
“Financial markets are by their very nature innovative so where the tier 1 banks have dropped out, others have stepped up to the plate. Much of this is wrapped around the prime-of-prime concept which whilst playing a key role still lacks a huge amount of definition, but at CMC Markets we’re looking at using the strength of our balance sheet to augment our own position as a provider of liquidity” said Mr. Elston.
“We’re acting as a liquidity provider to a growing number of brokers and are increasing our visibility in this space every month. We have a diligent approach when it comes to data transparency, which is certainly helping bolster or standing here, too and in addition to growing our institutional business, this also means we can offer better quality execution to our retail base. Ultimately the client – whatever the size – wants the confidence that we can fill an order better than another provider, even in a fast moving market” Richard Elston, Head of Institutional, CMC Markets
“In terms of negative balance protection, CMC Markets operates a strong risk management based framework. This ethos continues to hold strong throughout the business – both in terms of retail and institutional counterparties. We invest the time to understand who we are doing business with to ensure we have a full understanding of the risks we as a company are facing. Especially in the institutional sphere, we understand the benefits of addressing risk on a case-by-case basis” he said.
“Trading costs in the wake of the SNB event two years ago may have risen, but it’s fair to say that the market has managed to adapt to ensure that the trading experience is little changed. The most obvious exception here would seem to be the risk posed by falling interbank FX volumes, not least as more flow is internalised, leading to the run of flash-crashes we have seen in recent months.”
“Again this stresses the need for appropriate counterparty risk management, but assuming that more of the best-capitalised brokers expand their reach in terms of liquidity provision, such instances are set to become less frequent and are unlikely to pose a meaningful risk to the market” concluded Mr. Elston
With regard to large retail FX brokerages that have a substantial interest in institutional liquidity and prime brokerage services, FinanceFeeds continued this discussion further by speaking to Glenn Stevens, CEO of GAIN Capital in North America.
Mr. Stevens today explained to FinanceFeeds “The SNB event was a watershed moment for the retail FX/CFD industry. Not only did it expose the inherent flaw in the non-dealing desk model, it also shined a sharp spotlight on weak risk management at some firms” said Mr. Stevens.
“For many, SNB represented a “new risk” – a gap move following Central Bank intervention. In contrast, members of GAIN’s senior risk committee, who’ve been working in the FX markets for over 60 years combined, have experienced the outcome of this type of Central Bank intervention on multiple occasions. We identified the risk that the SNB could take action to de-peg the currency early on and took corrective measures months in advance to limit our exposure.” – Glenn Stevens, CEO, GAIN Capital
“The silver lining of SNB is that it spurred investment in the technology & expertise needed to better manage risk – not just market risk but also credit and operational risk. As a result, we believe the industry as a whole is now better prepared to deal with the price action during and after major events such as Brexit and the US Election” said Mr. Stevens.
“However, that progress may not be enough for the majority of the brokers operating today to succeed in the long term. Following SNB, counterparty risk is now of much greater concern for financial institutions” he enthused.
An evergreen and highly respected leader, Mr. Stevens dissected the effect on the entire trading environment that this eventh had. “As a result, trading lines and prime brokerage availability have become more of a challenge for many small and mid-size brokers” he said.
“Firms like GAIN, which have the balance sheet and the trading relationships to do so, are now stepping in to provide liquidity services to brokers that are turned away from the more traditional sources. However, we also vet our counterparties stringently – their trading activity, capital position, among other criteria, and turn away business that doesn’t meet our risk profile” he said.
“Counterparty risk is also considered in the terms offered to these types of clients, i.e. margin rates, position limits, etc. Ultimately, access to liquidity is the lifeblood of our industry – and it’s much harder to come by post SNB.” – Glenn Stevens, CEO, GAIN Capital
“Also, SNB was a catalyst for additional regulation and increased scrutiny in general from regulatory bodies. While we endorse increased regulation that makes firms stronger, more operationally resilient and enhances customer protections, there is no doubt that increased regulation makes it more expensive and complex to operate a FX/CFD broker.”
In conclusion, Mr. Stevens said “As such, smaller, less capitalized or less experienced players will tend to be disproportionately impacted and we expect there to be additional consolidation in the industry as a result.”
Natallia Hunik, Global Head of Sales at Advanced Markets & Fortex explained to FinanceFeeds.
It’s hard to believe two years have passed since the SNB bomb, it seems like it happened just yesterday. This event has dramatically changed the industry and the way FX firms operate in today’s market.
While the short-term effect was a controversial one, with many FX Brokers looking to quickly regain their losses through questionable profit sharing arrangements, that proved to be a short-lived exercise. The industry seems to be slowly learning to live in post-SBN environment where credit access is tight and global de-leveraging trend prevails. Brokerages across the board take risk mitigation very seriously these days.
Looking back at the past 2 years, for all of us in liquidity provision and distribution space, it became obvious that market participants looking for liquidity are now much more scrupulous in their counterparty due diligence. Moreover, regulators now take counterparty risk seriously and many (most recently, Cysec) introduced a set of requirements for liquidity providers brokerage can onboard (criteria include minimum capital, regulatory licenses and more).
Prime of Prime solutions are in high demand post-SNB, and Advanced Markets and Fortex end to end solution that includes premier institutional liquidity and best of breed high performance technology are better than ever positioned to service the needs of funds, brokerages and proprietary trading firms.
Advanced markets Prime of Prime offering allows access to multi-bank pricing and liquidity, while realizing operational efficiencies, STP and reduction in capital expenditures.