The Last Look…
Posted by Colin Lambert. Last updated: May 20, 2025
As someone who has taken the, ahem, ‘occasional’ loss in his time, I find myself irritated by a report that a bank is facing multiple claims from clients over FX derivative losses following the recent volatility in markets, with the claimants using two old favourites “mis-sold” and “complex products they did not understand”.
According to a Reuters News report, UBS is in talks with a small number of clients over losses on (another regular participant in this ongoing soap opera) Target Redemption Forwards, or TARFs, following the dollar’s drop post-Liberation Day.
It’s hard to know where to start with this, but I guess three thoughts or questions immediately come to mind. Firstly, the bank has been naïve in the extreme if it failed to strengthen its disclosures around these products – after all, we’ve had several instances of TARF-related losses over the past 15 years, funnily enough they all came when markets moved.
I find it hard to believe the disclaimers aren’t in place, you can go on the Internet and access Term Sheets and they all mention the products are aimed at experienced investors and come with high risk.
So what about the clients? Putting aside the cynical observation that they only seem to care about these things when they go wrong – is “I didn’t understand what I was buying” really a good enough excuse these days? – they could easily have conducted a quick search of the products that would have elicited several news items about huge losses and subsequent legal claims.
Thirdly, and collectively, you have to think that both parties have got their head in the sand and are ignoring history if their thinking was that all was serene in the geo-political and macro-economic worlds and that high volatility was something from the “old days”. Patently this was not, and is not, the case. There have been more unpredictable regimes in the world, but I am not sure there have been in the powerhouse that is the US. Who’d have thought the dollar was going to move when a man with ‘previous’, took over in the White House with a well-publicised agenda to shake up the trade world order?
It sounds, and is, nonsensical, but sometimes you wonder how far boundaries will be pushed before someone actually takes responsibility and wears the loss?
Where things get a little messy in this latest instance is the presence, according to Reuters, of retail clients. Previously problems and claims around these products have been bought by corporate treasuries (who also argued, conveniently, they didn’t know how they worked), but retail users throws in a different dimension – not least, how did they get access to such risky trades? Inevitably, it comes down to who popped the question? Was it the bank selling (and yet again I feel obliged to mention how we “sell” derivatives, but “trade” a set of forwards) or did clients come across TARFs and ask for exposure? It should not be ignored that these products also make clients some decent money.
Either way, in this case, you suspect the problem is a long way from the actual FX business, and this is, perhaps, something that does need to be addressed. The trading business was probably providing them for the Private Bank, which has a lot of sophisticated clients, as well as some, how do we put it, less-sophisticated, but rich, retail ones!
Obviously it’s never great when punters lose a lot of money, but it worries me that banks are apparently so willing to roll over and settle up when they may have done nothing wrong. Perhaps the clients are that valuable, the bank is willing to eat the losses on this, in which case perhaps the clients need to look at how much it is making out of them day-to-day! More pertinently, however, is the question, ‘where does this stop?’
Are we entering a world where performance boundaries come into play? In other words, if clients make a certain percentage of their original capital, would they be prepared to give it back to the bank? I think we all know the answer, which is where my thinking probably goes too old-school – they’re taking a punt on the markets, if it goes right, well done; if it goes wrong, hard luck!
What if this is transferred into the equity markets? I am sure UBS has millions of clients it advises on investment, last month equity markets took a dive of over 10% in a few days, was anyone thinking about claiming against those losses? It sounds, and is, nonsensical, but sometimes you wonder how far boundaries will be pushed before someone actually takes responsibility and wears the loss? I very much doubt they would push for compensation in equity or bond markets, why do it in FX derivatives? And before you all dive onto email to highlight ‘derivatives’, a huge amount of exposures in equity markets would have been via derivatives, and they would have been hurt badly I suspect.
The bank is apparently in talks over potential compensation – probably in the hope it can avoid a protracted lawsuit that will take years and probably more Swiss francs in legal fees than the clients lost – but my concern is the more of these we see, the more we are in danger of setting a tricky precedent.
As someone who is all for trader responsibility, it worries me that too many clients’ reflex response when things go wrong is to point the finger of blame at what effectively is the messenger. It is often said we live in an age of entitlement, if we go too far down this road, I fear it will only get worse, and that is a very dangerous environment for markets.
