Swissquote ran against the industry grain, having been one of the first to announce damages wrought by the abolishment of the Swiss National Bank’s currency peg earlier this year. However, the silver lining from the event has been an augmented interest in trading currencies in Switzerland – the group’s CEO, Marc Bürki weighs in.
1. How was business during the 2014 year and what do you feel could have been improved upon moving forward?
We acquired MIG bank in December 2013 which was a very big step for the Swiss market. As such, 2014 for us was actually a year of integration – we had to merge MIG bank with our own operations to cater to our existing client pool, which taken as a whole was quite an intensive job over the year. This is all behind us now and everything is finalized at present, along with our international network.
2. How did the clients transition process elapse? For instance, did the majority of clients at MIG decide to remain with Swissquote after the merger?
The acquisition was made through a bank merger, which means that all the clients of MIG bank became clients of Swissquote automatically. Ultimately, we did not suffer any client attrition, a trend that has continued to date.
More difficult however, or often underestimated in mergers is the human resource factor. You have two different companies, two different enterprise cultures, etc. and you need to create a new company out of two existing ones. Overall, this took us the duration of the year to accomplish and to finalize this, including a achieving a level of harmony across our joint sales force, subsidiaries, etc.
This was not the first acquisition we have undergone and overall we are quite happy now, despite the vast amount of work it took for us to get here, smooth and running, as one congruent entity.
3. How has the Swiss market developed in the past years, is there any competition?
Yes, since April 2009 in Switzerland if you want to be a provider of forex services you need a full bank license, otherwise you can’t legally perform this type of business. Looking back, there was a number of smaller brokers that simply disappeared from the market entirely. They could not comply with the new regulations as they didn’t have enough liquidity to become a bank.
After the new era of regulation in Switzerland, there were only four banks left in the country – MIG, Dukascopy, Saxo Bank, and Swissquote. In acquiring MIG in Switzerland, we are now by far the largest player in the market. Recently IG received a bank license in Switzerland to pursue Swiss clients.
4. We have seen FX trading grow by a substantial margin in your quarterly results. Was this growth largely in H2 when volatility picked up or a general trend throughout 2014?
First and foremost, when you compare 2014 to 2013 our revenues increased almost 45% year-on-year. When we compare the results between 2013 and 2014 we have to take into account the merger of MIG. During the first three quarters we did not account for the combined business of MIG who we only acquired in September 2013, which ultimately skewed these figures slightly.
Despite this however, Swissquote experienced a very robust growth year-on-year. What we managed to do well was to consolidate the network of clients that MIG had in Switzerland and worldwide. Institutional clients, professionals, etc. were all attracted by our liquidity pool and technology.
To sum up, our growth is largely due to the acquisition of MIG, but there is also an organic component to it.
5. Could you share with us some details about your partnership with PostFinance?
The deal with PostFinance is concerning our online trading business. Looking at our 2014, our numbers totaled $152.2 million (CHF145.5 million) in revenues from this segment. These figures are largely incoming from commission income. This is basically the trading of options, securities, bonds, etc. This is a very Swiss business with 95% of our clients coming from Switzerland. Presently, we have approximately 50% market share of these products in the country.
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In this segment of our business we actually see growth difficult given our relatively high market share. This is why we decided to team up with the second largest entity on the market, i.e. PostFinance. They provided a service called Yellow Trade and we offered them to use our technology and our execution platform as a white label which resulted in a joint venture in 2014. The partnership will help us grow the business segment in Switzerland.
6. Shifting course here, how unexpected was the Swiss National Bank (SNB) decision? Given that you are in dealing with clients in Switzerland you also had more exposure to the market.
One thing that cannot be understated is that we were exposed to the fact many of our client were biased to short Swiss francs. What this means is that many of our customers trading forex were very concerned about the Swiss franc’s value against the euro and this was a popularly traded currency pair just because of that.
The communication of the SNB was so strong and frequently mentioned in the Swiss newspapers. You could hardly find a week where they didn’t relay that the Swiss franc was completely overvalued. There was a constant flow of one-sided information and after a while people started to believe firmly that the CHF could go even lower than the level of 1.20 at which the EUR/CHF was supported.
As such, a number of clients ended up with larger leverage and bigger exposure. Short Swiss franc positions (meaning long EUR/CHF) have been built up since the 1.2500 level. Many clients were badly hit with the 30% exchange rate move during the abrupt CHF appreciation following the abolishment of the currency floor. This resulted in a number of negative balances totaling $26.2 million (CHF25 million), which is what we have set aside to cover the losses.
7. Do you expect to recover some of these funds?
Delving into the specifics, we found around 420 clients in total who experienced negative balances with the biggest loss coming in at $1.47 million (CHF1.4 million) and the smallest roughly $1 (CHF1). There’s a very large spectrum of negative balances to deal with.
Roughly two-thirds of these clients and of the amount is actually from Swiss clients, which we see as good news for us. The Swiss legislative process allows for a number of means to use to recover the funds. There is basically no such thing as having uncleared bank debt in the country – you have to pay back.
Our approach to clients was first to discuss with them if they need time to repay negative balances. One thing that have to be clear about is that they owe us this money and Swissquote did not force them to build up the market positions they had taken. We are willing to continue working with the affected clients and are open to discussions about how to solve the negative balance issues. At the end of the day we are expecting to be paid back the money owed to us.
In the end we expect a big portion of the debts to be recovered, but it will take time. Speaking about the third of clients and funds which are outside of Switzerland we will take a case-by-case approach. If clients that have a few thousand of their negative balance are not willing to pay it back, then it wouldn’t be cost effective to pursue ways to recover those funds.
8. How could a brokerage have remained protected from such an event?
We are only intermediaries and we don’t take market positions. We have about 15 banks providing liquidity to us and whenever a client makes a trade the position is passed on to them. The story is different if you are a counterparty to the transaction – then the client’s loss is a broker’s profit. For the brokers which are market makers it was easy forgive negative balances.
We still think that acting as intermediaries over the long term is the better business model. The Swiss franc case is an isolated one and there’s probably a learning curve there about how much leverage one should provide on certain currency pairs. Probably some changes will come to the market, for example we have dramatically increased the margin requirements on the Danish krone.
9. What is your outlook for 2015?
We are aiming to increase trading volumes by 20% this year, we’re positive about how the business can be developed going forward. After the full integration of MIG we have the right infrastructure and talent to move forward. Despite the SNB event, we think that our goals are achievable.
We have seen a lot of new accounts opened after the SNB event, as clients started to look for a safe harbor. There were many M&A opportunities on the market, however since we are regulated as a Swiss bank, there is a set of compliance procedures that need to be carefully considered. It was easy with MIG, which already was a bank before the acquisition.