The Day the Swiss Franc Floor Broke: January 15, 2015

On January 15, 2015, the Swiss National Bank announced it was abandoning a policy it had defended for more than three years and had, days earlier, publicly reaffirmed. The Swiss franc moved more in the minutes that followed than most currencies move in a year, and the shock left at least one retail broker insolvent and another needing emergency financing. This is a case study in a different kind of surprise than most of the events covered elsewhere on this site: not a data release or a policy pivot investors could debate the odds of, but a central bank reversing a specific, repeated public commitment with essentially no warning.

September 2011: the floor is set. Facing a surging franc as investors sought safety from the eurozone debt crisis, a move that was hurting Swiss exporters and pushing the country toward deflation, the SNB imposed a floor of 1.20 francs per euro, committing to buy unlimited quantities of euros if the exchange rate approached that level. For more than three years, the policy worked as intended, and investors and businesses increasingly treated the 1.20 floor as a fact of the market rather than a policy that could be reversed.

January 15, 2015: the floor is removed, without warning. The SNB announced it was discontinuing the minimum exchange rate policy effective immediately. In his own account of the decision, SNB Chairman Thomas Jordan pointed to the franc's overvaluation having eased since the floor was introduced, to monetary policy diverging further between major currency areas, and to the euro's broader depreciation against the dollar, which was dragging the franc down against the dollar too and changing the calculation behind the floor. He did not frame it as the SNB running out of capacity to defend the rate, a central bank issuing its own currency faces a different constraint than a leveraged fund defending a position, but as the floor no longer being justified by conditions on the ground. The announcement gave essentially no advance notice to markets, a deliberate choice, since any advance warning would have triggered the same rush that followed anyway, just earlier and potentially larger.

The move itself. EUR/CHF closed at 1.2009 on January 14, essentially at the floor. Within minutes of the announcement on January 15, the pair broke through parity and traded in a wide, venue-dependent range as low as the mid-0.80s, reported intraday prints varied by feed and platform in the chaos of the first few minutes, before recovering somewhat to close the day at 1.0095, a decline of roughly 16 percent from the prior close even after that partial recovery. Switzerland's SMI stock index closed 8.7 percent lower the same day, its worst single day in decades, after falling as much as 14 percent intraday, as investors priced in a much less competitive environment for Swiss exporters.

Why the shock was so severe for currency traders specifically. Because the floor had held for over three years and had been explicitly reaffirmed by SNB officials just days before the reversal, a large amount of leveraged retail and institutional currency trading had been built on the assumption that francs could be bought or sold near 1.20 with limited downside risk, an assumption the market itself had priced as close to certain. When that assumption failed, positions that were leveraged, common in retail foreign-exchange trading, generated losses that in some cases exceeded the trader's entire account balance, since price gaps that large meant stop-loss orders couldn't be filled anywhere near their trigger levels. The consequences varied by firm: UK broker Alpari UK entered insolvency outright, while FXCM, a larger US-listed broker, was left with a roughly $225 million client-debit shortfall and avoided the same fate only by securing a $300 million emergency loan from Leucadia, a deal that came with steep terms and effectively ended FXCM as an independent company within a few years. Several banks, including Citigroup, Deutsche Bank, and Barclays, also disclosed material trading losses tied to the move, though individual firms' figures weren't consistently disclosed in a way that supports a single reliable industry-wide total.

What this episode illustrates that other currency shocks don't. Most of the market moves covered elsewhere on this site involve a data surprise or a policy shift that at least some investors had assigned real probability to in advance. This one is closer to the opposite case: a policy that the market had come to treat as effectively permanent, reversed with no lead time by the one institution capable of doing so. The lesson isn't that pegs are inherently unstable, many currency pegs hold for decades, it's that a market price anchored primarily by one institution's commitment carries a specific kind of tail risk that a market price set by broad supply and demand doesn't.