We received a lot of questions about Swiss market in January. One of the most important questions was: Why did some forex brokers become insolvent ?
A shocking decision by Swiss Bank to unlock the currency price made in just Franc to rise about forty percent a few minutes. Many Forex brokers became insolvent because they didn’t have enough capital in order to overtop the situation, especially because it happened so suddenly.
Margin calls were issued to investors without enough Swiss Franc as soon as the SNB announced their decision. When everything is going on as usual, the brokerage may exit ongoing trades whenever they want to. But in special circumstance, brokers didn’t have time to exit the trade after their clients issued margin calls. That is what made currency brokers lose.
Most of brokers have their liquidity covered by having money in banks in equal amounts as at clients’ funds.
But it showed that having equal amounts of money with clients and at the bank wasn’t sufficient in order to survive a situation like this. It showed that those brokers who had at least 2:1 ratio made it through, and the higher the ratio in favor of bank account – the higher chance to pull through the crisis.