Retail broker Saxo Bank is anticipating legal disputes following its decision to retroactively re-price FX trades that occurred during the Swiss franc’s volatile swing on 15 January.
Saxo didn’t honour the close out positions but instead reset the price of the positions the next day, at a significantly unfavourable rate. The bank posted a statement on its website outlining that prices were restated in a “careful review” of all transactions “in accordance with industry practices”.
“Due to the Swiss currency floor being removed, we experienced a significant number of stop outs in few minutes,” continued the bank in the statement. “There was very little liquidity in the market, which caused a significant price gap. Our best execution policy mandates that we trade all orders in a fair and equitable manner.”
“It’s not unlikely that we will face legal challenges,” says Steen Blaafalk, Saxo Bank’s CFO, adding that he hopes it doesn’t come to that. “We are actively working with each individual client to find a plan of action for repayment.”
Saxo estimates its own losses may be as high as $107 million.
“Because we all know that trading the markets offers both risks and rewards. You take the gain when you are successful, and unfortunately, you must accept the loss when the markets move against you,” explains Blaafalk.
In September last year, Saxo warned its clients that the CHF could face a storm and, as a result, it "significantly" reduced clients’ access to leverage, according to a Saxo spokesperson.
However, many believe that Saxo shouldn’t be pushing its losses onto clients. Legal experts also dispute whether in this instance re-pricing would stand up in court.
According to Kalvin Chapman, solicitor, banking and financial regulation team, dispute resolution at Manchester-based Berg Solicitors, “It is extremely unlikely that Saxo Bank will succeed in the courtroom with retrospective amendments simply because these trades became unprofitable for them.”
He points out that the ISDA Master Agreement, which governs the relationship between the customer and its broker, provides for a retrospective amendment in the event of fraud or a mistake. “Fraud isn’t at play here, although it will be in FX litigation happening later this year,” says Chapman.
“It isn’t the customer’s fault that the Swiss government did what it did, and it isn’t their fault that the [retail brokerage] didn’t sell everything it had at the most appropriate point,” he adds. “Therefore the $107 million losses that Saxo has incurred can’t be fixed by way of retrospective trades, unless it can identify within the ISDA documentation that something within the trade itself was a mistake, which isn’t likely to happen.”
However, Saxo may have greater success in arguing that it was unable to implement a stop-loss order due to extremely illiquid market conditions, according to Chapman.
“There will be a provision [in the ISDA Master Agreement] which says that stop-loss or automatic close outs can only be performed if there is liquidity in the market, but it will come down to expert examination of market liquidity, second-by-second as it occurred,” he adds.
Chapman is representing a trader who had a stop/loss order at a large European bank, which meant their euros should have been sold immediately when the Swiss event occurred. However, the bank waited 30 minutes, a time lag that cost the trader CHF 3 million.
“That isn’t [the trader’s] fault – it is the bank’s fault,” says Chapman. “The bank was under direct order to sell the second it got to a certain level and it didn’t. Therefore the bank will have to pay for it.”
In this case, Chapman’s client is able to produce documentation that they believe illustrates a sufficient level of liquidity in the market to execute the stop-loss order.
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