Saxo Defends Franc Repricing Citing Extreme Lack of Liquidity

(Bloomberg) — Saxo Bank A/S says its decision to adjust prices on franc trades retroactively was unavoidable given the extreme liquidity shortage that followed the Swiss National Bank’s decision to abandon its euro peg.

The Danish broker bank has the legal option to go back in time and adjust the prices at which it conducted trades, unlike some other brokers, according to Steen Blaafalk, chief financial officer and head of the bank’s risk management.

“We never comment on competitors, but some brokers do not have the right to amend client trades legally, and some cannot even go after negative accounts,” Blaafalk said yesterday in an e-mailed response to questions.

The comments follow a backlash from clients who say the bank acted unfairly. Saxo confirmed yesterday it told retail and institutional customers 12 hours after the fact that it had adjusted the rates at which it executed some franc trades on Jan. 15, the day Switzerland abandoned its euro peg. CMC Markets, a London-based broker, said it took a similar decision on its franc trades that day.

“There was no reliable liquidity,” Saxo said in a note to clients explaining how it arrived at the new rates. “Saxo continued to fill client orders as the price fell sharply.”

In the minutes after Switzerland dropped the franc’s peg to the euro, the market for the currency cross came to a virtual standstill. Yet orders continued to flow in.

‘Abnormal’ Flows

Saxo says it filled an “abnormal” volume it valued at about 818 million francs ($910 million) in just 30 minutes. The bank had assets of $4.2 billion and client collateral deposits of $7.7 billion in 2013, the latest year for which figures are available.

Now, brokers and their clients are sorting through the aftermath of the franc’s swings from its 1.20 peg to the euro to as strong as 0.85172 before closing at 0.97554 on Jan. 15, according to data compiled by Bloomberg.

Saxo applied its new price of 0.9625 for executed trades from 9:30 a.m. to 30 seconds past 9:41 a.m. London time on Jan. 15, and a second price of 0.88 for trades executed from 30 seconds past 9:41 a.m. to 10:01 a.m.

The bank said initial rates “did not correspond to the actual market liquidity available to us at that time.”

In a notice to its customers, CMC said it had published prices on Jan. 15 that were “incorrect” because they didn’t reflect the market’s frozen state.

Severe Dislocation

From 9:30 a.m. to 10:02 a.m. London time that day, the Swiss National Bank’s decision created “severe dislocation” in the market, and the banks CMC relies on to trade ceased to provide the broker with prices, it told investors in the note.

Yet its trading platform continued to accept orders, CMC said. Given the extraordinary circumstances, the company said it considered it “fair and reasonable” to adjust rates.

A number of the world’s biggest banks were caught on the wrong side of franc trades, with Citigroup Inc., Deutsche Bank AG and Barclays Plc suffering about $400 million in cumulative trading losses, according to people familiar with the events. Some others made money, with JPMorgan Chase & Co. reaping as much as $300 million, according to two people with knowledge of the matter.

Saxo, which estimates it may have lost as much as $107 million, is bracing itself for lawsuits after its decision to adjust prices, Blaafalk said.

Client Losses

Censeo Asset Management, based in Vienna, said this week it “can’t recognize the lawfulness of this measure,” and will help its clients challenge Saxo’s repricing if a review shows the action is “questionable under Austrian law.” The company had offered clients a Saxo-brokered franc product.

Some of Saxo’s retail clients are also airing their anger. Zoran Ljubic, a 31-year-old Croatian who holds two master’s degrees and is a director at Tremex, which offers investment advice and Russian vodka, says his account with the broker plunged from about $14,000 before Jan. 15 to a deficit of $276,000. He’s been a Saxo client since 2009, he says.

“If they didn’t have any real price support from their platforms, they should have stopped trading,” Ljubic said.

Saxo says it’s working closely with clients who lost on the franc’s plunge. The bank is “liaising with each client on an individual basis to clarify what is possible with respect to each client’s situation and agreeing to an individual plan of action for the repayment,” Blaafalk said.

–With assistance from Alexander Weber in Vienna.

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at [e-mail] To contact the editors responsible for this story: Veronica Ek at [e-mail] Tasneem Hanfi Brogger, Christian Wienberg