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A Chronicle of the Impact of the Swiss Franc’s Rise in Poland

Not only forex traders suffered losses on the day of the SNB announcement, CHF denominated mortgage holders also got a

“Black Thursday”, the 15th of January 2015, is a day that will long be remembered on the Polish financial markets, and not only there. On that day, the exchange rate of the Swiss franc (CHF) shot up when the Swiss National Bank (SNB) made the surprise announcement that it was lifting the exchange rate cap and letting the CHF appreciate. This was bad news for customers of Polish banks who had CHF-denominated mortgages. Overnight, their debts went up dramatically and banks began pondering what to do.

A great deal of commotion ensued. The entire Polish population was bombarded with news about the hardship the so-called “Frankowicze” (“Swiss Franc victims”) were experiencing. News about how their debts had increased, whether banks would be demanding additional collateral, or whether the state would finally come to their assistance stormed through. This was also a good opportunity for some Polish politicians – in fact it was the perfect moment for them to present themselves and their views in an election year. After all, everyone was keen to help.

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The Polish government entered into the discussion as well. The Polish Bank Association (the industry organization of Polish banks) quickly came up with a range of measures for banks whose customers might be feeling particularly bitter about the SNB’s decision. The head of the Polish financial services regulator, the Financial Supervision Authority (KNF), even put forward his proposal for restructuring Swiss franc denominated debts.

There is a particular group of people however, who I think was forgotten. Nobody cared about the fate of forex traders. Some brokerage and bank clients (some Polish banks provide retail forex broker services) have opened CFDs positions, on Swiss franc pairs.

The problem could be a serious one however, because it turns out that a large number of Polish forex brokerages and their investors suffered huge losses. According to figures published by the KNF, the number of clients who suffered losses trading the CHF (whether realized or unrealized) was 1464. The total of realized losses (where the CHF trades have been closed) by clients on the 15th of January was approximately PLN 16.4 million, while unrealized losses came to approximately PLN 2.5 million.

According to figures published by the KNF, most brokerage houses dealing on their own account registered losses on the 15th of January. The impact of the slump in Polish zloty (PLN) to the CHF on the stability of the Polish banking sector and the financial standing of borrowers has been substantial.

Forex is one of the fastest-moving financial markets in the world, with prices changing in a matter of seconds, however few have envisioned the speed of the CHF move on January 15th. For brokerages who hadn’t taken steps to protect their trades the event meant severe losses. For the time being (thankfully), there is no indication that any of the Polish brokers suffered a loss big enough to cause solvency issues.

CFD trades on the Swiss franc caused negative account balances which meant that extra payments had to be made to cover the funds on the client accounts. The amounts were often in the thousands of PLN (apparently there are clients who lost almost a million PLN).

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At the moment, it is difficult to judge the scale of the event but the problem is quite serious and I don’t think it would be wrong to say that it could lead to certain systemic risks. In the Polish media however, one can scarcely find any comment which, as in the case of the “Frankowicze”, raises the issue of Forex investors who were involved in trading the Swiss franc, not to mention of anyone who “would come to their defense.”

While “Frankowicze” can still hope that their situation will change (if the rate of the CHF falls, for example, to below PLN 2), investors who have fallen victims to their own bad CFD trades have to pay their liabilities towards brokers and have no choice but to pay their due negative balances. For them there’s only a slim glimmer of hope that in the future they will manage to recover their losses by trading on the market.

A large group of players on the capital market could therefore feel neglected – because no one cares what happens to them (there are probably some who think that way). What am I supposed to do in such a situation, should I make an extra payment towards the negative balance, or maybe seek a legal remedy in court against the broker? These are questions that a victim of the CHF move has to answer by himself/herself.

In the past, the KNF issued opinions sharing its views about the conduct of forex brokers. One of the arguments raised by the KNF is that firms should warrant proper resolution of cases when inaccurate price quotes have been identified under the terms and conditions. If a given broker establishes the terms and conditions regarding a particular issue, the investor is then able to cite those circumstances, but does any investor carefully reads through the specific clauses in the terms and conditions agreement? Similarly, for agreements for personal loan facilities, not many do. Not all brokers include in their terms and conditions clauses concerning inaccurate price quotes. Some however, provide for the option of citing inaccurate price quotes within a set time limit (for example, 3 days from the day the transaction was concluded). In fact, in this respect a variety of solutions are adopted by individual brokerages.

The only course of action available to clients who do not manage to “reach an agreement” with their broker or successfully cancel a transaction on the basis of contractual provisions is a legal remedy sought in court. This is because it is possible to make use of the so-called rebus sic stantibus clause in art. 3571 of the Polish Civil Code. This says that in cases in which, due to an extraordinary change in relations, providing the performance would entail excessive difficulty or expose one of the parties to gross losses which the parties did not foresee at the moment the agreement was concluded, a court may, upon considering the interests of the parties and in accordance with the principles of community life, specify the manner in which the obligation is to be performed, the level of the performance, or even dissolve the agreement. When considering the agreement a court may, where necessary, issue a ruling on how the parties should regulate the mutually due payments, according to the rules described in the previous sentence. Little is known however about how Polish courts would act in such cases.

The best solution from a systemic point of view would however be to find a compromise between brokerages and their clients. Let’s hope that this happens.

About the author

Piotr P.Gołębiowski – advocate, managing partner at GoldenBakes Law Firm, provides advice on all legal and commercial aspects of forex. www.goldenbakes.com

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