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An Important Update from Synergy FX MD, Christian Dove

Synergy FX is all business as usual post the Swiss National Bank’s removal of the peg between the CHF and the EUR last Thursday. There has been no affect to Synergy’s core brokerage business, nor has there to our funds management business. We of course all have heard of some high profile casualties and I would like to explain how and why several of our friends and competitors have been hit where the likes of Synergy and other risk conscious companies have not:

The problem has hit hardest on the bigger houses with large volume Straight Through Processing business. The normally perceived zero risk model of passing all flow through to a further liquidity provider has had its one horrible hole exposed – not correctly managing credit risk…..

To explain – the problem came from the magnitude of the gap in the CHF crosses. Clients that traded with the expectation of no peg removal may have had relatively small trades on that were fine in any normal condition - but the associated loss when the market moved blew out their total balances and pushed them in to potentially large negative equity. Now this is not totally an issue of leverage (some of the houses hit were low leverage providers) - it's just the quantum of the move in price and gap. Now of course this is the debt of the clients not the broker - but of course the broker has to fund the real world. If it doesn't have the money then it can't meet capital adequacy requirements and is forced to become insolvent or delay the inevitable with bridging loans. If these brokers continually source most of their clients from foreign countries to their own, how can they expect to cost effectively chase bad debts? This is credit risk. We will of course see secretive fire sales of these companies. Their value is their hot client bases, and there will be greedy hands willing to take on ridiculous bad debts as they know to wait for scraps to purchase from a liquidator will already be to have missed the feed.

Any of my customers who subscribe to our free commentary from our Funds Management Head, Todd Deiterich, knew everything there was to know about the potential of the market even before it happened. We've been talking about it for weeks. We don't profess to be gurus - and like everyone else we thought the outcome would be the reverse. But the reason that we and our sister company are safe is that we were prepared. On our own funds management product "Phoenix", Todd had deliberately taken off any CHF exposure much sooner. Shamelessly I report Phoenix is now over 100% return in our first 15mths. Also in the last few weeks we have been monitoring clients CHF exposures. The minimum any house should have been doing was increasing margins of these crosses and increasing the cost of carry swaps. Anyway the fact that the big boys didn't do such things and pre-empt such a disaster is an exposure that they didn’t take seriously or worse didn’t understand the real credit risk of opening client accounts in jurisdictions where any chance of chasing bad debts is cost prohibitive.

So upshot - Synergy has had no significant issue. We don't have a multitude of bad debts we have to follow. Now maybe people will realise why compliance and account opening processes are so thorough. Low doc brokers are bad brokers. I'm proud of my risk management process and my brilliant team. You want a decent broker - pick up the phone and talk to the Synergy staff.

Christian Dove
Managing Director Synergy FX

Sunday, 18 Jan, 2015 / 3:47

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