As the market turmoil settles and a major commodities player announces its attention to decamp from London to Geneva, it's time to reassess the significance of the Swissie-Euro decoupling.

Switzerland's commodity trading industry generates about 20 billion francs (US$23bn a year – making up around 3.5% of economic output. It is not an industry which likes surprises from unexpected quarters. When the Swiss National Bank (SNB) abandoned the ceiling put in place during the financial crisis to prevent the Swiss franc from strengthening beyond CHF1.20 to the EUR, it came as a rude shock to the market.

The franc jumped by as much as 39%  against the euro and US$ at one point, inflicting significant losses – particularly on foreign exchange brokers, traders and banks before plateauing at around a 14.5% rise against the EUR. For many the problem was not so much that the policy had been changed, but the fact the change was not signalled, offering little opportunity to plan or benefit from the subsequent volatility – though of course the SNB believed it had no choice but to decouple in this way.

Impact on commodities and financing

The impact has hit hardest not just in the derivatives market on foreign exchange traders, but also in the physical market on Swiss exporters, as it is now significantly more expensive to export products from Switzerland. Those with commodities contracts priced in CHF will be assessing any potential forex exposure they may have, particularly if their income is in Euros or a currency other than CHF. Buyers may have anticipated a low forex exposure on entering into the contract, but the uncoupling will mean that the contract is now significantly more expensive than it was previously.

If a contract is no longer economically viable, what are the options for the participants to exit such contracts? 

The event is unlikely to constitute a force majeure - however unpleasant, the change in rates will not prevent payment. There is a possibility that parties could look to material adverse change clauses, but these are usually drafted to concern the state of the individual contract participants rather than market realities. There could be early termination events, or the possibility to vary a contract if local conditions make the contract unfeasibly expensive without such a price rise.

Although there may be short term turbulence, the long term outlook for the Swiss franc is positive, and so parties should do what they can to ensure that their contracts are suitable for the new European market reality. Despite uncertainty around corporate taxes, immigration law and currency turmoil – Switzerland is still time-zone friendly for traders East and West, has a skilled local talent pool of 10,000-12, 000 traders and financiers, and offers easy access to finance.

Exodus unlikely

While many of the major commodities companies that have their headquarters in Switzerland have begun in recent years to view Asia as a potential new major operating hub, there are no signs of an imminent exodus. While the currency debacle may encourage further consideration of the alternatives, the market has already seen one contrarian move.

On January 29 the FT reported that Bunge, the international agricultural trader, closed its sugar and ethanol operations in London and announced its intention to move to Geneva. The SNB decision may not have been signalled – but this feels more like a mogul than a mountain. 

Originally published in the Trade & Forfaiting Review, 4 February 2015.

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