Photographer: Ulrik Jantzen/Bloomberg

Saxo Says It Kept Taking Franc Orders to Avoid Being Sued

In a letter to the Danish regulator, Saxo Bank A/S said it was trying to avoid being sued when it continued accepting Swiss franc orders after the market froze on Jan. 15.

In the letter, dated Feb. 9 and obtained by Bloomberg News through a freedom-of-information request, Saxo says it was concerned that blocking franc orders in the moments after the Swiss National Bank abandoned its euro cap would leave it open to litigation by clients eager to adjust their positions.

“Some customers could potentially have sought to make Saxo Bank liable for such a decision that, under the conditions, could have led to significant losses,” Saxo said, according to the letter it sent to the Danish Financial Supervisory Authority. Saxo spokesman Kasper Elbjoern declined to comment on the bank’s correspondence with the regulator.

Saxo continued accepting orders, but then told clients in e-mails seen by Bloomberg it would execute their trades at less favorable prices than those initially shown. The bank published a list of those prices some 12 hours later. Chief Financial Officer Steen Blaafalk said in an interview later the same month that Saxo was expecting some clients to sue because of its decision to reprice.

Saxo sent the letter to the FSA after the regulator ordered the bank to provide a detailed report of its handling of franc trades on Jan. 15 amid client complaints that the broker treated them unfairly.

No Liquidity

Saxo has defended its actions saying the lack of “reliable liquidity” after the franc went into a free float gave it no choice but to reprice its trades. The bank also says that, even if it had decided to stop accepting franc trade orders, clients would have had access to the market through other channels.

“Currency isn’t traded on a central exchange, so even if Saxo had decided to suspend trade, there would have been a market via other market participants which Saxo Bank doesn’t have an influence on,” it said in the letter.

Part of the problem for Saxo on Jan. 15 was that the financial institutions it relies on for liquidity stopped providing executable prices, according to its letter to the FSA. Those financial institutions also rejected trade requests and ceased to quote prices, Saxo said in the letter.

The franc appreciated on Jan. 15 to its strongest since the introduction of the euro in 1999, closing at about 0.98, compared with the 1.20 cap the SNB had imposed until that day. The franc weakened 0.13 percent against the euro as of 9:04 a.m. local time to trade at about 1.07.

Margin Calls

Saxo said it first focused on closing the mounting number of accounts that were breaching margin requirements as the franc soared in value. Then, the bank tried to notify clients through pop-up alerts and e-mails that it was closing positions and would reprice trades, according to the letter to the FSA.

“Due to the dramatic increase in the Swiss franc, there was no time to wait for clients to close positions themselves,” according to a Feb. 1 letter to the FSA by Kromann Reumert, a Danish law firm hired by Saxo to review its actions. The correspondence was provided by the Danish FSA as part of the same freedom-of-information request through which the Saxo letter was obtained.

The bank’s decision to reprice trades resulted in “worse prices” for the “vast majority” of clients, but the bank was within its legal rights to do what it did, the law firm concluded.

Bank Losses

Switzerland’s decision to send its currency into a free float in January left a number of the world’s biggest banks on the wrong side of franc trades, with Citigroup Inc., Deutsche Bank AG and Barclays Plc suffering about $400 million in cumulative trading losses, according to people familiar with the events.

Saxo has said it stands to lose about $107 million, or roughly a third of its equity capital, because of the exchange-rate move.

In letters to clients, copies of which were sent to the FSA and obtained by Bloomberg, Saxo instructs customers to settle negative cash balances, citing a contract provision that lays out what items “the client shall pay to Saxo on demand.”

“Initial fills visible on your account did not reflect the actual market liquidity available at the time, and they were not executed in the market,” according to one letter sent by Saxo and obtained by Bloomberg.

Retail Clients

Lawyers representing about 30 retail customers with a combined 100 million kroner ($15 million) in claims are contesting Saxo’s actions and asking the bank to reverse its decision to reprice, saying the dispute will end in court if Saxo doesn’t reimburse its clients.

“We think they’re not allowed to do what they’ve done -- that their agreement with customers doesn’t give them the right to do it,” Jakob Ravnsbo, an attorney at Andersen Partners, which is representing the clients, said in an interview. “So we dispute this way of treating customers and of course ask them to change that.”

Saxo says it has worked hard to ensure customers are treated fairly. Since Jan. 15, the bank has been “liaising with each client on an individual basis to clarify what is possible with respect to each client’s situation and agreeing to an individual plan of action for the repayment,” Blaafalk said Jan. 27.

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