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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

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.