Banks and clients rebuild relationships post-SNB move

Pricing difficulties since SNB currency floor removal cause friction

Stone on Sand
Banks and clients make peace

Trade pricing difficulties since the Swiss National Bank's removal of the franc's currency floor have caused friction with clients

The majority of disputes between banks and clients over pricing Swiss franc deals have been resolved since the Swiss central bank's January 15 removal of the franc's currency floor, with banks yielding to demands to stick to mispriced deals, leaving only a few unresolved cases and lingering bad feeling on both sides.

Relationships became fraught after the Swiss National Bank (SNB) pulled its minimum exchange rate in the franc, leading to a market event where banks struggled to price contracts and some attempted to cancel or reprice off-market trades away from clients. But, after months of tussling, relations are cautiously being rebuilt.

"I have reached a satisfactory settlement. The nightmare is over!" says a client involved in a dispute with Deutsche Bank. The firm declined to comment.

Other banks involved in negotiations with customers since the SNB event include Bank of America Merrill Lynch (BAML), Barclays and Citi. Citi is the only one involved in a legal tussle.

Banks suffered difficulties in pricing on January 15 as a result of the sharpness and speed of the market move in the Swiss franc. CME Group, which serves as a source of information to enable banks to price correctly electronically, was showing a markedly different price than EBS and other platforms because its circuit breakers were triggered, leading some banks to accidentally misquote or even temporarily shut down their automated pricing feeds.

BAML refused to reprice one of our trades... This kind of behaviour is damaging the relationship between banks and clients

After these trades had been executed, banks spoke to clients in an attempt to redo trades at more reflective market levels, but some have little sympathy with the banks' position.

Relationships bruised 

One client was told its short EUR/CHF spot trades, executed just below the floor, would be cancelled by its counterparty, Barclays, in the hours after they took place. The client says the issue between the two parties has now dissipated, but the relationship with the bank is not the same as it once was.

"We stood our ground, they weren't happy and they never came back, and it has kind of gone away at the moment. [In the end] they've honoured the original trades. Our relationship with Barclays is not as good as it used to be, as that event affected it somewhat, but we still have a relationship and we're still a customer of theirs," says a trader at the New York-based fund.

"Barclays is a price maker and provides us with liquidity, so they control the buttons as far as what sort of spreads they show us. If they don't like us then they can show wider spreads and our price engine won't trade with them, so if they want our business they have to show us competitive prices and then they will win it," the trader continues.

Barclays declined to comment.

Meanwhile, some disputes ramble on. One of BAML's clients says the bank and his firm are still negotiating over an off-market EUR/CHF trade, which it says has cost it millions of dollars. 

"BAML refused to reprice one of our trades that was executed well below the 0.85 low for the day and instead wants to reprice it at 0.75–1,000 pips below the recognised low. This kind of behaviour is damaging the relationship between banks and clients," says the client.

Currency platform EBS Market, which is considered the reference price for the Swiss franc, recorded its official 'low' for the day at 0.85. The low, which forms part of the firm's market data sent out to clients, is calculated by there being five million worth of base currency traded at the same rate within a two-minute period.

BAML declined to comment on the issue with the client. 

Citi lawsuit

Despite several disputed client trades, it was Citi that first publicly decided to shed light on an issue it had with a client by filing a lawsuit. The bank filed its complaint on March 13 with the US District Court for the Southern District of New York, seeking $25 million it believes it is owed by its former foreign exchange prime brokerage client, Tormar Associates.

But the family office and proprietary trading firm is now fighting back, having filed a countersuit on April 23. Both parties were in negotiations to resolve the dispute following events on January 15, with Tormar co-founder Ron Marks expressing his surprise at Citi's decision to prosecute.

"We don't understand why they are suing us," Marks said in an interview with FX Week, a sister title of Risk.net. "They are suing us for losses they caused by breaching our International Swaps and Derivatives Association (Isda) agreements. Not only did they improperly force us to sell at an improvident time and in violation of the agreements, but they forced us to do so exclusively with their London trading desk and at prices that were significantly worse than those available in the market."

Citi responded to the counterclaims by stating any suggestion of the bank acting inappropriately was "totally baseless and without merit".

Tormar, which was set up in 2003 and began trading forex in 2005, moved to Citi's 'alternative credit programme' within the bank's forex prime brokerage division in 2009, because it was offered better margin than its prime broker at the time, UBS, transferring $1.85 million in the process. On January 15, Tormar had short currency option positions against the Swiss franc, which become unprofitable in a matter of minutes.

"I was on holiday in Grand Cayman the week the SNB pulled the plug and on that day I awoke to a voicemail from my coverage at Commerzbank, telling me what had happened and alerting me to the fact USD/CHF was now trading at 0.75 – down from 1.02. There were also a large number of missed calls on my phone from various counterparties, as well as the people in my office. Oddly, I did not receive any calls from Citi," Marks said.

This article first appeared in sister title FX Week.

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