Danish Bank Takes Hard Line on Clients' Currency Losses

By Tommy Stubbington And Chiara Albanese 

When the Swiss National Bank suddenly let its country's currency rocket on Jan. 15, Pawel Jaworski, a welding engineer from Elblag, Poland, was a loser.

Using an online account with Copenhagen-based Saxo Bank A/S, Mr. Jaworski had bet the Swiss franc would fall. He closed his trade with a loss of EUR1,000 ($1,148). "I thought, 'I'm not the winner, but it could be worse,' " said Mr. Jaworski.

It was.

That evening, Mr. Jaworski, 38 years old, checked his account again. Saxo had changed the price at which his trade was executed. He was out an additional EUR2,000. "This is two or three months' wages; this is money that I don't have," he said. The central bank had removed the franc's peg to the euro, allowing the currency to rise, ahead of the European Central Bank's launch of a bond-buying program to boost the eurozone's economic prospects.

Saxo said any losses are its clients' fault. It said its business terms explicitly grant it the right to revise prices after trades have been closed. "I think it was a fair way of dealing with it," said Steen Blaafalk, Saxo's chief financial and risk officer. "Clients that lost money can blame us, or they can blame themselves." Saxo said it doesn't comment on individual clients.

January's swing in the franc was the biggest move in the modern history of developed-market currencies. It jolted money managers, corporate treasurers and central banks around the world. It cut an especially vicious swath through the world of retail foreign-exchange brokers, who let mom-and-pop investors borrow heavily to fund risky bets.

Some brokers have taken huge losses. Others have shut. Some have forgiven loans made to clients. Denmark's Saxo Bank has taken an aggressive approach.

According to the firm's communications reviewed by The Wall Street Journal, client trading records and interviews with customers, Saxo has retroactively repriced some trades and is chasing its own customers for about $100 million in losses.

Repricing of individual trades isn't unknown in the industry, but the altering of large numbers of trades by such a big margin is highly unusual.

Denmark's financial-services regulator last week ordered Saxo Bank to provide details of its handling of Swiss franc trades on Jan. 15. The regulator declined to comment.

The big losses are a consequence of how retail brokers operate. Foreign-exchange markets are relatively placid. A 1% daily move in a currency, commonplace in stocks, is exceptional.

To magnify trades, brokers let clients put up a little cash and borrow the rest from the broker, known as margin trading. That enables an investor to leverage a smaller position into a bigger one. If the holdings rise in value, the margin will magnify gains. Likewise, if the assets decline, the losses are amplified.

In some cases, clients can trade amounts more than 100 times the actual cash they deposit.

Some Saxo customers were able to trade at a 25-to-1 margin ratio, meaning they could make a $10,000 wager on the Swiss currency by using only $400 of their own money. When the franc soared about 30% against the euro in the minutes following the central bank's decision, many customers were clobbered far in excess of the cash they had put up. That is money they now owe the broker.

Many Saxo customers said they can't afford to pay and have been treated unfairly.

One issue is Saxo's decision to recalculate the exchange rate at which losing bets were closed. The bank said the move was made to better reflect the market's chaotic conditions that day.

Wagering about $25 for each $1 put up, Tay Lip Sing, a 44-year-old technology consultant in Singapore, bet the franc would fall against the dollar. He set an automatic limit, called a stop-loss order, to close his trade if losses got too large, according to Mr. Tay and account records reviewed by the Journal. The franc climbed 18% against the dollar soon after the central bank's move.

Mr. Tay said after the Swiss National Bank acted, he sighed in relief that he had set up the stop-loss order. His loss, he said, should have been about $900. But Saxo later told him the trade closing his position had been revised to a price well beyond the stop-loss order. Mr. Tay was out $22,800. The money was deducted from his Saxo account.

"It is like buying a ticket with British Airways for $1,000 and then finding out that the price of the same seat has been changed to $20,000," Mr. Tay said.

U.S. regulators have moved to temporarily restrict the amount of borrowed money used by currency traders, while some brokers have said they would increase margin requirements.

Saxo promotes a vision of individual responsibility free from government intrusion. The firm hands out copies of "Atlas Shrugged," Ayn Rand's hymn to individualism and capitalism, to employees and clients. It offers a free copy of the Danish translation of the novel to anyone who fills out a form on its website.

But Saxo's move to reprice trades runs contrary to some its own marketing materials. On its website, it promises "dedicated liquidity" and "no slippage" to users of its foreign-exchange trading platform.

"With Fixed Spreads from Saxo Bank, you don't have to wonder what price you'll pay to trade FX," the website said, using the shorthand for foreign-exchange trading.

In recent days, Saxo has tried to make a deal with some customers, offering discounts to the balance Saxo has said they owe if they pay promptly and don't sue, according to interviews with customers and correspondence reviewed by the Journal.

"We are actively working with clients to find a plan of action for repayment," Mr. Blaafalk said.

"I sincerely feel sorry for any client that suffers losses, and I understand investors were surprised because the move was just so extreme, " he said. "Now is the right time to come to an agreement with each individual client, and then we can all move on."

At least one other provider is chasing clients for money it is owed. U.K.-based IG Group Holdings PLC said it suffered a hit of as much as GBP30 million ($46 million) from the franc move, including GBP18 million owed to it by customers.

IG didn't reprice trades, but many customers are unhappy they were able to run up unexpected losses when their stop-loss orders weren't carried out at the prescribed price.

In letters to clients reviewed by the Journal, IG blamed the situation on a lack of available trades in the market on Jan. 15 and the large number of client orders it needed to cancel.

Marcel Zidani, a concert pianist from Evesham in the U.K., is being asked to pay more than GBP4,000 to IG after a bet against the franc turned sour. Mr. Zidani, 41, had a stop-loss order, but it took about 45 minutes to execute the trade, causing the transaction to be executed at a much lower price.

"When the SNB hit, I was flabbergasted and in a state of shock; I just saw the losses piling up on the screen," he said.

IG declined to comment on client losses.

Other brokers have been more charitable.

FXCM Inc. said last week that it would forgive loans made to small traders. Its customers in total owed it $225 million after the franc move. The New York firm received a $300 million rescue loan from Leucadia National Corp. to continue operations after the client losses threatened to put it in violation of regulatory capital rules.

Toronto-based Oanda Corp. said it didn't reprice any trades after the franc move and isn't trying to claw back cash from clients. "We felt the right thing to do was forgive the losses," Chief Executive Ed Eger said.

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