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Thursday’s incredible action in the currency markets will eventually become the stuff of lore, with many having a where-were-you-when-it-happened kind of story to tell. We’re beginning ourselves to piece together what activity was really like at some of the leading forex brokers – and why some fared better than others.
Today we have the pleasure of getting the perspective of Saxo Bank Chief Financial and Risk Officer Steen Blaafalk. Steen is responsible for all legal and compliance, finance, risk management and business intelligence within the bank. He is also listed as a member of the Board Management, alongside Kim Fournais and Lars Seier Christensen.
LeapRate: Hi Steen, and thanks for speaking with during what must still be a very busy time for you. I’m sure our readers would like to know what it was like in the office there last Thursday morning. Can you describe more how Saxo Bank dealt with the incredible order flow after the SNB’s move.
Steen: When markets become illiquid, and there is a need for massive execution of orders at the same time, orders piles up until they can be executed and they are being executed in larger blocks when possible. That means that it is not one-for-one matched trades to the interbank market. So some orders might be partially filled and the final fill takes time. Thursday, many orders had to be executed at the crucial minutes of SNB’s announcement and it took around 30 minutes before the liquidity came back to market and the total amounts of order finally had been filled.
In order to make an objective pricing of all client orders and ensure best execution, all orders had to be filled in order of sequence from when they were initiated and to when the could be filled. This had to be validated after all the execution had taken place, to ensure all was treated fairly.
I think it was a fair way of dealing with it. The move was just so extreme. I’ve been in the market 30 years and have never seen anything like it.
LeapRate: What did Saxo Bank do differently than some of the other brokers who didn’t get through Thursday’s spike quite as easily? How can a broker properly risk-manage for such an event?
Steen: We warned, as early as September that the Swiss franc could face a storm and significantly reduced our clients’ access to leverage [editor’s note – see here]. We did this both to protect clients and also to protect ourselves. We are now glad that we did that, and will now do it for other instruments. The extraordinary events of the past few days have shown that the market is returning to extreme volatility which, in some asset classes, we have not seen for years. We have decided to tighten access to leverage because we want our clients to be fully prepared for increased volatility and short-term shocks, like the SNB decision.
LeapRate: What is your new policy on leverage?
Steen: Margin on major currency pairs (involving USD, EUR, GBP) and major equity indices is now 2%, or maximum 50x leverage. Other instruments vary generally from 3%-10% margin, with certain specific currencies even higher, such as the CHF at 15% margin.
LeapRate: What is your situation with negative client balances?
Steen: We are still liaising with those clients to settle unsecured amounts and status is that we expect that some clients will not be able to the settle the balance in full and that the bank will incur losses in this respect. But as we indicated late last week, those amounts are relatively immaterial to Saxo Bank overall.
LeapRate: How do you see the past week’s events affecting the industry? Is there a lot of displacement of clients, IBs and affiliates?
Steen: All in can say is that Saxo Bank has seen an increased number of new clients transferring their accounts from other brokers to Saxo Bank despite our decision to tighten access to leverage. We attach great importance to acting as a responsible industry player and certainly do not want to compete on risk like some industry players who offer gearing of up to 400. Saxo Bank intends to lead the industry with a responsible approach to leverage and encourage all other players to do the same.