Negative balances: warning the clients just isn’t enough

4 weeks after the SNBomb and some brokers are still going after negative balances of traders that went short on the franc and are now required to pay more than they deposited.

Saxo Bank, which was heavily scrutinized a bit too harshly by the Wall Street Journal for taking a hard line against clients with negative balances, came out defending itself, saying it warned clients about their long CHF positions. Here is why this is just not enough:

Risk management

So, Saxo Bank was aware of the one-sided nature of CHF positions and even warned clients back in September and even took action by raising margin requirements. This was reported in advance by Forex Magnates, which revisited this topic now, also speaking to Steen Blafaalk, which serves as Group Chief Financial & Risk Officer and a member of the Board of Management at Saxo Bank.

This sounds good: they were aware of the risks and took measures. Not all brokers bothered to check this out. So, the company not only included such a case in its Terms & Conditions but also took an extra step and went forward with a warning.

There is no doubt that everything is legal, but probably not smart enough.

But wait, the broker still lost a lot of money on January 15th: it expected to see a loss of up to $107 million due to the SNBomb. The risk management of Saxo Bank CFO leaves much to be desired.

But what does this imply about future risk management? Some brokers that made even worse risk management decisions are no longer with us, and it isn’t certain that clients will see their funds returned.

Bad Reputation

Moving from the past to the present, what will they and other brokers get from chasing negative balances? They will probably retrieve some of the money, but will likely lose more in bad publicity. Saxo Bank CFO is quoted as saying: “But some of us want to have a lifetime relationship with clients, so we want to offer a prudent opportunity to do risk management and diversification and to add value”.

How is asking traders to pay more than they were willing to risk consistent with a “lifetime relationship”?

If these clients return to forex trading, will they opt to deposit even more funds with the broker that chased them? Will this move serve to attract new prospective clients?

I hope that Saxo Bank, as well as other brokers that go after negative balances, reconsider these decisions.  It’s never too late to change your mind.

Here is more:

SNBomb – Reactions from 75 forex brokers

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