After the Swiss National Bank dropped the bombshell on the markets last Thursday morning, we have been contacted by several traders from all over the world in relation to the trade losses caused by an alleged lack of liquidity in the primary and secondary money markets.
The move to remove the cap on the Swiss Franc exchange rate with the Euro at 1.2 clearly came as a shock for the markets, with the Franc briefly rising as high as 0.85 to the Euro, before dropping back down to 1.02 by lunchtime. This event seems to corroborate the speculation to expect the introduction of Quantitative Easing on 22 January 2015.
It would have been very expensive for the Swiss Franc to keep printing money to keep the exchange rate at 1.2 with the Euro when the Euro's value has been reduced as far as it has. So while the Swiss Economy will take a hit from this, facing deflation and defaults on loans, it was simply another example of currencies pricing themselves ahead of an expected event.
Our lawyers in the Forex Litigation team are currently investigating the scale of the practice of banks' pre-empting, or front-running, clients' FX orders.
Excel Markets – Negative Equity
Clients of New Zealand forex broker Global Brokers NZ Ltd, which operates Excel Markets, have been told the company "can no longer meet regulatory minimum capitalization requirements of N$1,000,000 and will not be able to resume business.
The majority of traders in a franc position were on the losing side and sustained losses amounting to far greater than their account equity. Excel Markets claims that the interbank market for francs was illiquid for hours after the event and that no traders with an open franc position were able to close it for a significant period of time, at any broker.
We are currently advising clients on Excel Markets' liability to reimburse the losses incurred on trades that could not be exited due to the alleged illiquidity in the primary and backup liquidity providers for hours after the event.
Whilst each case will depend on its own circumstances, the main issue to consider if whether Excel Markets is liable for the losses incurred by the clients directly with the liquidity provider
UBS: non execution of stop loss orders
We have also been contacted by clients who have suffered significant trade losses as a result of a delayed execution of stop loss orders by UBS, which were designed to limit an investor's loss on a position in a security.
Stop-loss orders can be an effective tool, but they don't always work and investors must use them with caution. This is especially true in volatile markets. These types of order work well if the stock or market is declining in an orderly manner, but not if the decline is disorderly or sharp, as it has happened when the move on the Swiss franc fuelled by the Swiss National Bank's unexpected policy reversal of capping the Swiss franc against the euro resulted in rare volatility and illiquidity.
Each case will be heavily fact-dependant but traders may be entitled to seek an indemnity from UBS for such losses because the "best endeavours" execution defence may not be applicable to these circumstances. Investors should read carefully the Order Execution Policy and seek legal advice from lawyers with experience in this field. Some banks have best execution policies in place which may be that the bank will endeavour to get the best price for their client and it is possible that UBS has breached its best execution obligations towards its clients.
We are investigating if UBS attempted to trigger client stop loss orders at a lower figure for the bank's own benefit and to the potential detriment of clients and/or other market participants.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.