Banks slash FX leverage for clients after Swiss franc rout

Fri Feb 6, 2015 8:42am EST
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By Patrick Graham

MILAN Feb 6 (Reuters) - Banks are cutting back on the credit they offer leveraged investors in foreign exchange, after an eruption in Swiss franc volatility one day last month forced changes in risk-management models, several industry figures said on Friday.

In the aftermath of the franc's surge on Jan. 15 -- as much as 40 percent -- and the losses that resulted, U.S. authorities imposed a 50 times cap on the leverage retail currency brokers like FXCM can offer clients.

That means by putting $1 on a currency swing, the client actually bets up to $50. The rest is effectively provided on credit by the broker or the broker's banking partners.

No such limits are put on retail FX trading in Europe, or on the wholesale market, where the stakes are far higher for the banks and funds betting trillions daily on currency moves.

Several sources with FX trading operations, speaking on the sidelines of an industry conference in Milan, said the impact of the volatility caused by the franc meant banks were cutting the leverage they offer even their most trusted and valuable clients.

"Whereas a big hedge fund would get 30-40 times leverage from a bank before, now it might well be half of that," said the head of sales at one trading house, asking not to be named.

"This is all being driven by the risk-management models. When volatility rises as much as it has, the banks are slaves to the models, which say they have to cut back on risk. This has dominated the past two weeks for us."

Banks are still sifting through the fallout of the franc move, which meant millions in losses for many clients who had bet the Swiss National Bank would keep its ceiling on the franc's value against the euro indefinitely.   Continued...