The penetration of the Swiss National Bank’s EURCHF cap of 1.20 CHF on Thursday was due to confusion over a credit agreement and lack of paperwork for it. Usually banks have an open credit agreement with the Swiss National Bank, which has a standing offer to buy euros at 1.20 Swiss francs when these banks wish to sell their euros.
According to a report in the Wall Street Journal, what happened on Thursday was that six small European banks which wanted to sell euros, didn’t have those trading agreements.
Consequently, these six banks went to find other financial institutions with whom they did have credit lines. Those institutions were willing to buy their euros, however below the SNB rate of 1.20 franc. It was reported that they bought lower at 1.1990 francs, the trader said. It couldn’t be determined which banks were involved. The SNB declined to comment, but some traders said the central bank intervened to stem the franc’s rise.
This was the reason why the EURCHF only briefly dipped below the 1.20 floor set by the Swiss National Bank last September 2011, in an effort to control the Swiss franc strength. Traders said that after the event, the SNB spent more than 1 billion euros to defend the EURCHF floor and bring the rate back above 1.20 CHF.