How to Avoid the Next Super-Spike?

This article was written by Søren Bjerregaard, Sales Director, CFH Clearing

When I think about the SNB events of last year, I think about how much the landscape has changed – brokerages which used to exist are no longer around and banks have pulled out of the prime broker space or significantly changed terms, impacting the whole market.

clients are more cautious about who they do business with – and that is a very good thing

The reaction from banks to the SNB crisis actually created a lot of opportunity for established, reputable institutional business to business providers as many brokers needed to find a new prime broker relationship. Whilst we would not have been able to predict this on the catastrophic day of 15 January, our business has benefited from the changes which subsequently happened

Now that the fallout is over, there are a number of changes for the better – most noticeably, that brokers are much more aware of the importance of having the right risk management tools in place.

A stronger industry

I believe that as an industry we are undoubtedly stronger. In general, clients are more cautious about who they do business with – and that is a very good thing.

Of course, there will always be brokers who are out to make a quick buck and will act irresponsibly. Those brokers will always be able to attract clients through pricing or marketing campaigns, offering terms which are ‘too good to be true’ – and this continues to be the case.

There’s a tendency to have short-term memories and quickly forget what happened

So have we learned valuable lessons from what happened last year? One year on, we certainly have. However, we have seen time and time again that people don’t always learn from history. There’s a tendency to have short-term memories and quickly forget what happened. It’s important that the increased focus on monitoring and managing risk continues to remain a priority and that clients continue to select brokers with a strong track record in the industry and excellent relationships with their prime brokers and liquidity providers.

What is likely to cause the next black swan? Hard landing in China, breakdown of the European Union, interventions from central banks or governments, war or terrorism?  I guess if we could tell it would not be a black swan. But there will certainly be another one in the future. It could take place in one year’s time or in twenty years – nobody knows. All that we do know, is that it will be caused by something that we are least expecting. Let’s just hope we are more prepared for it next time.