Swiss Franc Shock: The Day the SNB Floor Broke

Key Takeaways

• On January 15, 2015 the SNB dropped its 1.20 euro floor and the franc surged about 30 percent.
• The floor had hidden a massive short-volatility bet built on cheap, one-way carry trades.
• Alpari UK went insolvent, FXCM needed a $300 million rescue, and Everest Capital's main fund was wiped out.
• A pinned price is not a safe price; the risk builds quietly until the pin is pulled.

Background

After the 2008 crisis and during the euro-area debt turmoil, investors treated the Swiss franc as a safe haven. Money flooded into Switzerland, pushing the franc so high that Swiss exporters and tourism faced serious damage and the economy risked deflation. To stop the climb, the SNB acted.

On September 6, 2011 the SNB announced a minimum exchange rate of CHF 1.20 per euro, declaring it would "no longer tolerate" a rate below that level and stood ready to buy foreign currency "in unlimited quantities." The message to markets was blunt: the franc would not be allowed to strengthen past 1.20, and the central bank had an unlimited printing press to enforce it.

For more than three years the floor held, and it worked as advertised. Because the SNB had promised to defend 1.20 without limit, traders treated a long euro, short franc position as nearly free money. The euro could not fall below 1.20, so the downside looked capped while the carry and any euro rebound were yours to keep. That belief is the heart of the story.

Holding the line was expensive. To keep the franc from rising, the SNB had to keep buying euros and other currencies, which ballooned its balance sheet. SNB foreign-currency reserves climbed from around CHF 200 billion in mid-2011 to almost CHF 500 billion, close to 70 percent of Swiss GDP, according to CEPR. The Swiss central bank had taken on a currency position of a size few governments ever attempt.

What Happened

By late 2014 the pressure was building again. The euro was sliding against the dollar as the European Central Bank moved toward large-scale bond buying, and because the franc was tied to the euro, holding 1.20 forced the SNB to buy ever more euros just as the euro was weakening. Defending the floor was becoming a bottomless commitment.

The acute phase was effectively one morning.

• September 6, 2011: The SNB sets the minimum exchange rate at CHF 1.20 per euro and pledges unlimited intervention.
• December 18, 2014: The SNB introduces negative interest rates on sight deposits, a first attempt to relieve pressure on the floor.
• January 15, 2015 (roughly 10:30 a.m. Zurich time): The SNB announces it is discontinuing the minimum exchange rate, effective immediately.
• Within minutes: The franc surges against the euro, breaking through parity. EUR/CHF trades near 0.805 at the extreme, far below the old 1.20 floor, before settling back.
• Same day: The SNB also cuts its policy rate on sight deposits to -0.75 percent and lowers the three-month Libor target range to between -1.25 and -0.25 percent.
• January 16, 2015: Retail broker Alpari UK confirms it has entered insolvency; FXCM reveals clients owe about $225 million.
• January 16, 2015: FXCM secures a $300 million rescue financing package from Leucadia National.
• January 17, 2015: Reports surface that Everest Capital's flagship Global Fund has been wiped out.

The price action was violent and disorderly. In the chaotic minutes after the announcement the franc soared by around 30 percent against the euro, per RTE, with EUR/CHF briefly trading near 0.805 before trimming the move to settle 13 to 15 percent higher on the day, according to contemporaneous reporting. Against the dollar and other currencies the franc jumped sharply as well. There was almost no liquidity in between, so stop-loss orders that were supposed to limit losses filled far away from their intended levels, or did not fill at all.

In its own statement the SNB explained that the euro's depreciation meant the franc had weakened against the dollar, so the overvaluation that justified the floor had partly corrected. Enforcing 1.20 would have required interventions "of rapidly increasing magnitude," which the SNB judged unsustainable. SNB chairman Thomas Jordan, in remarks the same day, said monetary policy in the major currency areas had diverged so much that the minimum rate was "no longer sustainable."

Why It Happened

The Swiss franc shock was a short-volatility blowup hiding inside what looked like a stable price. A currency floor is a promise to absorb selling pressure, and that promise quietly transfers risk from the people taking the trade to the central bank holding the line. The longer the line holds, the more comfortable everyone gets, and the bigger the eventual move when it breaks.

Start with the carry trade. Because the SNB pledged to defend 1.20 without limit, going long the euro and short the franc looked like a one-way bet with a capped downside. Traders, retail platforms, and hedge funds piled into the same position, often with heavy borrowing, because the floor seemed to remove the main risk. The crowd was leaning hard on one side of the boat, confident the boat could not tip.

The floor also created a feedback loop on the SNB's own balance sheet. To hold 1.20 the bank kept buying euros, and as the euro weakened through late 2014 it had to buy even more. Reserves near 70 percent of GDP meant the SNB was carrying enormous exchange-rate risk on a position it could not easily exit without triggering the very move it was trying to prevent. Removing the floor by surprise was the only way to avoid signaling the exit in advance.

When the floor went, the mechanics of leverage and stop-losses turned a large move into a disaster for the most exposed players. In a normal market a stop-loss caps your loss near the level you set. On January 15 there were almost no buyers of the euro on the way down, so a position meant to close at, say, 1.19 might fill near 1.00 or lower. For a trader using high leverage, that gap did not just erase the position, it produced a negative balance, a debt owed to the broker. The losses ran straight through the stop-losses that were supposed to contain them.

That is why the damage concentrated where leverage was highest. Retail FX brokers had let customers trade the franc on thin margin, sometimes 50-to-1 or more, on the assumption that the SNB floor made a big adverse move impossible. When it happened, customer accounts went deeply negative, and the brokers were on the hook for shortfalls their clients could never repay.

By the Numbers

• Floor level and dates: CHF 1.20 per euro, set September 6, 2011, discontinued January 15, 2015. (Swiss National Bank)
• Intraday franc surge: about 30 percent against the euro in the minutes after the announcement, with EUR/CHF briefly near 0.805. (RTE; contemporaneous reporting)
• New policy rate: SNB sight-deposit rate cut to -0.75 percent; three-month Libor target range lowered to between -1.25 and -0.25 percent. (Swiss National Bank; Thomas Jordan, BIS)
• SNB reserves: rose from roughly CHF 200 billion in mid-2011 to almost CHF 500 billion, close to 70 percent of Swiss GDP, by the eve of the de-peg. (CEPR)
• FXCM: clients ran up about $225 million in negative equity owed to the firm; FXCM secured $300 million in rescue financing from Leucadia National. (SWI swissinfo.ch; Fortune)
• Alpari UK: entered insolvency on January 16, 2015, one day after the de-peg. (RTE; SWI swissinfo.ch)
• Interactive Brokers: estimated about $120 million in client losses, under 3 percent of its assets. (Fortune)
• IG Group: estimated impact of up to roughly £30 million, near $45 to $50 million. (Fortune)
• Banks: Citigroup and Deutsche Bank each lost about $150 million, with Barclays losing tens of millions, per contemporaneous reporting. (Fortune; press reports)
• Everest Capital: its roughly $830 million Global Fund, launched in 1991, was wiped out; SEC findings put the fund's EUR/CHF gross exposure at about 400 percent to over 900 percent. (SEC; press reports)

Aftermath

The retail FX broking industry took the hardest blow. Alpari UK, a well-known retail platform, entered insolvency on January 16, 2015, citing "exceptional volatility and extreme lack of liquidity" that left most franc-positioned clients with losses exceeding their account equity. Global Brokers NZ shut down. FXCM, one of the largest US retail FX firms, disclosed roughly $225 million in client negative balances and within a day arranged $300 million of emergency financing from Leucadia National to stay solvent; its shares fell sharply before trading resumed. Other firms such as Interactive Brokers and IG Group absorbed losses but survived.

The hedge-fund casualty was Everest Capital. Its flagship Global Fund, launched in 1991 and managing roughly $830 million, had bet against the franc and was wiped out almost instantly. The SEC later examined the firm's risk management. In an April 2020 settled administrative order, the SEC found that Everest Capital LLC and its principal Marko Dimitrijevic had built a highly concentrated EUR/CHF position with gross exposure from about 400 percent to over 900 percent of the fund, and it charged them with failures relating to risk management and disclosure. The matter was settled, with the firm and its principal required to pay over $3 million; the order resolved the charges without a trial.

Banks were not spared. Citigroup, described in reporting as the world's largest currency dealer, and Deutsche Bank each lost on the order of $150 million, and Barclays lost tens of millions, according to contemporaneous press accounts. The SNB itself paid a price: it reported a record loss of around CHF 50 billion for the first half of 2015, driven by CHF 52.2 billion of exchange-rate losses on its foreign-currency holdings as the franc soared.

Regulators tightened the screws on retail leverage in the years that followed. The episode is frequently cited in the case for the leverage caps and negative-balance protections that European authorities and others later imposed on retail FX and contract-for-difference trading. The broader lesson stuck: a price guaranteed by an official body is only as durable as that body's willingness and ability to keep paying for it.

Lessons for Investors

1. A pinned price is not a safe price. The 1.20 floor made the franc look like the lowest-risk trade in the market, which is exactly why so much money crowded into it. The danger was not visible day to day; it accumulated in the size of the position the SNB was holding. When you see a market that "cannot" move because an authority is defending it, ask what the move looks like the day that defense ends.

2. Capped downside is an illusion when liquidity vanishes. Traders assumed the floor capped their loss, and stop-losses would handle the rest. On January 15 there were no buyers between 1.20 and parity, so stops filled far away or not at all. Risk controls that depend on a functioning market can fail precisely when you need them, in a gap.

3. Leverage turns a price move into a solvency event. A 30 percent currency move is large but survivable for an unleveraged holder. For someone at 50-to-1 it produced a negative account balance, a debt rather than a loss. The amount of borrowing, not just the size of the move, decided who walked away and who blew up.

4. Concentration is the silent multiplier. Everest Capital did not just hold a franc view, it held it at a gross exposure the SEC pegged near 400 to over 900 percent of the fund. Even a correct long-run thesis cannot survive a single position large enough to end the fund in one morning. Position size is a risk decision separate from being right.

5. One-sided trades crowd, and crowded trades unwind together. Brokers, banks, retail traders, and hedge funds were all short the franc for the same reason: the floor made it look free. When it broke, they all needed to buy the franc at once, which is why the move was so extreme. If a trade is comfortable because "everyone knows" the risk is removed, the exit will be narrow.

Frequently Asked Questions

What was the Swiss franc shock in simple terms? The Swiss franc shock was the sudden currency move on January 15, 2015, when the Swiss National Bank abandoned its cap of 1.20 francs per euro and the franc instantly jumped about 30 percent. The surprise wiped out traders who had bet the franc would stay weak.

Why did the Swiss franc shock happen? The SNB had capped the franc at 1.20 per euro since 2011 by buying huge amounts of foreign currency, but a falling euro and looming ECB stimulus made defending that floor ever more costly. Rather than keep buying without limit, the SNB dropped the cap without warning, and the franc repriced violently in minutes.

How much money was lost in the Swiss franc shock? Losses were spread across the industry. Retail broker FXCM faced about $225 million in client negative balances and needed a $300 million rescue, Alpari UK went insolvent, Interactive Brokers cited around $120 million, Everest Capital's roughly $830 million Global Fund was wiped out, and big banks each lost on the order of $150 million.

Could the Swiss franc shock happen again today? Yes, the underlying pattern can recur because central banks still defend exchange-rate levels and traders still crowd into "guaranteed" one-way trades. What changed is tighter rules on retail leverage and negative-balance protection in several markets, which limit how much damage individual traders can take.

What is the main lesson from the Swiss franc shock? Do not confuse a price that an authority is holding steady with a price that is genuinely low risk. The risk hides in the size of the defended position and the leverage stacked on top, and it all arrives at once the moment the defense is dropped.

Sources

1. Swiss National Bank. Press release: Swiss National Bank discontinues minimum exchange rate and lowers interest rate to -0.75% (15 January 2015). https://www.snb.ch/en/publications/communication/press-releases/2015/pre_20150115
2. Swiss National Bank. Press release: Swiss National Bank sets minimum exchange rate at CHF 1.20 per euro (6 September 2011). https://www.snb.ch/en/publications/communication/press-releases/2011/pre_20110906
3. Thomas Jordan, Bank for International Settlements. The rationale for discontinuing the minimum exchange rate and lowering interest rates (introductory remarks, 15 January 2015). https://www.bis.org/review/r150116a.htm
4. U.S. Securities and Exchange Commission. SEC Charges Private Fund Adviser and Its Principal for Misconduct Relating to Risk Management (Everest Capital LLC / Marko Dimitrijevic). https://www.sec.gov/enforcement-litigation/administrative-proceedings/ia-5491-s
5. SWI swissinfo.ch / Bloomberg. FXCM Faces Losses as Swiss Shock Leaves Alpari (UK) Insolvent. https://www.swissinfo.ch/eng/fxcm-faces-losses-as-swiss-shock-leaves-alpari-uk-insolvent/41219974
6. RTE. Swiss franc shock shuts some forex brokers. https://www.rte.ie/news/business/2015/0116/673161-alpari-uk-broker/
7. Fortune. How a $400 billion currency move triggered hundreds of millions in losses. https://www.fortune.com/2015/01/16/swiss-franc-400-million-losses
8. CEPR / VoxEU. Ten years after the Swiss franc shock. https://cepr.org/voxeu/columns/ten-years-after-swiss-franc-shock-lessons-prices-expenditure-switching-and-inequality

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.