The 10th Man: Keep Your Risk Managers Away From Me
By Jared Dillian
This week’s big news, of course, continues to be the massive revaluation of the Swiss franc (CHF). It’s perhaps the first instance of a G10 currency going up 16% in a single day.
From a strategy standpoint, there really is only one way to interpret this, as many people already have: it’s the end of central bank omnipotence.
Central bank says it’s going to do A, does B instead. For investors, it’s much harder to take risk in that kind of environment. So I think the logical thing to do is to look at other pegged/managed currency pairs in the world—like the Chinese yuan, the Hong Kong dollar, and the Danish krone—but also any situation where a central bank has said it’s going to do an unlimited amount of anything, because as you can see with the Swiss National Bank (SNB), it’s subjected to the same P&L forces as everyone else.
Moving right along, I want to talk about the risk management aspect of this trade.
Within a few hours, we knew that a couple of retail currency brokers needed capital, or else. And we learned that Polish and Hungarian folks who took out CHF-denominated mortgages were in big trouble too. But more important, anyone who was just plain old short the Swiss franc was also hosed with or without a stop loss, which wouldn’t have made much difference in this case anyway.
I’ve been trading for 15-plus years, and I have never blown myself up. (If I had, I probably would not be writing this.) Don’t get me wrong, I’ve done plenty of dumb things over the years, made lots of bad, even stupid trades, and I have occasionally let my losses run a bit too long. But I have never been hit by a Mack truck—walking into work and suddenly finding myself suffering catastrophic losses.
Knock on wood.
How Risk Managers Can Get You in Trouble
Let’s discuss the margin system that most FX trading shops use (and I use) for a moment. There are a lot of dumb journalists running around saying, “Why the hell are FX brokers offering their clients 25 or 50-to-1 leverage on currencies? More regulation!â€
