Sunday, January 18, 2015

Global fallout from Swiss Forex bombshell is not over yet | A perfect example of a “Black Swan” event

While, as already reported (OmiCronFX Mandelbrot software timing element saves the day), we were unaffected by the aftermath of the shock Swiss National Bank decision last Thursday to abandon the cap it had placed on appreciation of the Swiss currency against the Euro, others were not so fortunate.

Traders who had decided to take the SNB “jawboning”, to the effect that the cap was a sacred and unwavering line in the sand, at face value and place their bets accordingly, suffered badly. The Everest Capital Global fund, a well-established hedge fund, lost $830 million and was wiped out. In many cases, smaller individual, but very high cumulative, losses suffered by traders wound up being the responsibility of their brokers, when the large institutions who provide liquidity to the same brokers insisted on settlement and the brokers’ clients were not in a position to pay up, their equity accounts having gone well into negative territory.

The OmiCronFX brokers, Dukascopy, somewhat ironically headquartered in Geneva, Switzerland, were well on top of this situation. Four months ago they had foreseen the possibility of exactly such an occurrence and had restricted the leverage on client accounts accordingly. Dukascopy, which itself enjoys the status of being a Swiss bank, has issued the following statement: 

“CHF dramatic shift

Dukascopy Group announces that it has safely passed through the CHF dramatic price shift. It was achieved thanks to advanced execution technology, careful risk management policy and reduced leverage on EURCHF till level of 1:10.

The scenario of such shock had been anticipated four months in advance as shown in Dukascopy news published on 3rd of October 2014: "Due to the possibility of a break of the 1.2000 floor in EUR/CHF which may see significant price gaps and cause negative equity on client accounts, Dukascopy Bank is forced to implement a maximum leverage for EURCHF exposures of 1:10 as of 12 October 2014".

Dukascopy well known ECN business model and careful risk management approach proved once again to be reliable and trustworthy.”

A perfect example of a “Black Swan” event

Our friends over at Darwinex, UK FCA regulated both as a broker and as an investment manager, also survived the Tsunami. As well as providing a good commentary on the background and mechanics of the event, Juan Colón, Co-Founder, is forthright in his comments about their experience. Among other things, he has this to say:

“We came out of this just fine, mainly because we did most things right, and partially because we were lucky.

The whole thing is a perfect example of a “Black Swan” event, first identified by Nicholas Taleb in his book of the same name. This was the subject of an OmiCronFX commentary some time ago. Youcan access it here.

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