© 2006-2015 fxpro financial services ltd chf trading: the past, the present, and the future antypas...

© 2006-2015 FxPro Financial Services Ltd

CHF Trading:The past, the present, and the future

Antypas Asfour, CFA, CMT, PRM, IFQ | Portfolio Management Officer

10th Jordan Forex Expo & Awards

© 2006-2012 FxPro Financial Services LtdCHF Trading: The past, the present, and the future

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.

Disclaimer

3

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

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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.


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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


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SNB Statement

Source: Swiss National Bank Press Release, 6 September 2011


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Price Action – SNB intervention

Source: Bloomberg


8

Price Action – Low volatility

Source: Bloomberg


9

Price Action – Floor removal

Source: Bloomberg


10

Price Action – USDCHF

Source: Bloomberg


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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)


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Central Bank Size

Source: ECB, BoE, Federal Reserve, SNB, BoJ, BoC, World Bank (2014)

CHF Trading: The past, the present, and the future

European Central Bank

Bank of England Federal Reserve Swiss National Bank Bank of Japan Bank of Canada0%

10%

20%

30%

40%

50%

60%

70%

80%

Central Bank Assets as a % of GDP

Trading CFDs involves high risk of loss

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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


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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)

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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


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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)

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Impact of the floor removal

Major Forex brokers incurred large losses;

CHF Trading: The past, the present, and the future

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)

Trading CFDs involves high risk of loss

18

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%


19

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


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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?


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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


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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


© 2006-2015 FxPro Financial Services Ltd

CHF Trading:The past, the present, and the future

Antypas Asfour, CFA, CMT, PRM, IFQ | Portfolio Management Officer

10th Jordan Forex Expo & Awards

© 2006-2015 fxpro financial services ltd chf trading: the past, the present, and the future antypas...

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