The Swiss have taken a lot of blow back for the damage this has done to all sorts of businesses and individuals, from big banks to brokerages to mortgage holders in Hungary, but they had no great alternative.
Once it became clear the ECB was about to take the reins off when it comes to QE, the Euro was guaranteed to sink substantially, leaving the Swiss forced to foot the bill on a pegged hole that would be theoretically infinite (only theoretically). At the very least, the Swiss National Bank was going to partake in a mult-billion dollar losing effort - for no good reason - to try to keep the Franc capped against the Euro, while facing off against one of the most powerful central banks in the world. The only question then would be how much the Swiss would lose between now and capitulation later.
the problem was that they kept their poker face a little too well; just the week before all relevant authorities were adamant nothing was on the cards.
At the very least, the Swiss National Bank was going to partake in a mult-billion dollar losing effort
This is probably a dumb question, but... why would it necessarily be a losing effort? What would go wrong if they just kept on printing more and more Francs?
If they really had no great alternative, and the chain of reasoning was that clear, then traders would have anticipated it and it wouldn't have caused any major problems.
Since it was widely unexpected and people did lose piles of money, I expect there were other likely alternatives and perhaps your analysis may be suffering from a bit of post-hoc rationalization.
You can't just assume a free market discounting future events. The SNB was pegging the currency at an artificial fixed rate v. the euro. Which is of course the opposite of a free market and preventing the price from reflecting the expectation of the market.
So, traders start to anticipate a revaluation and buy francs. The SNB has to print and sell francs to maintain the peg. The SNB becomes aware that it is in an untenable position and will have to print a multiple of Swiss GDP worth of francs and effectively prop up the euro.
They have nothing but bad choices: buy an unlimited quantity of euros right in the face of QE; re-peg at a higher rate or against a different currency, but have an arrow painted on their back that the new rate may not hold; or float.
So, they float. Now the traders at retail brokers like FXCM who got hurt weren't necessarily net short on balance. The problem is FXCM allowed 50-1 leverage. Say you have accounts with $40m of equity taking $2b of short exposure to swiss franc, and foolishly going long a high yielding currency to pick up carry. And you could have 10x or any number of accounts correctly anticipating and going long francs.
Now, the franc jumps 20% without any opportunity to cover shorts. On 50-1 leverage the $40m equity accounts with $2b exposure $400m, or 10x their equity. A client has a $10k brokerage account and loses $100k, the broker can't recover that from them in most cases. The people who anticipated and were on the right side of the trade make out like bandits. But the broker still has to cover for all the losers so they are SOL.
TL; DR - Going from an artificial peg to a free market rate, you can't say that the artificial peg discounted all future events. Obviously the rate needed to adjust to do so. And even if a lot of traders correctly anticipated, FXCM foolishly put themselves in the position of having to cover those who didn't.
Lots of people made money too, I mean apart from the Swiss themselves (and the SNB who made a huge loss), someone had the other side of all those trades. And markets are not efficient, clearly not when there is a huge player like a central bank.
The article suggested that some of the brokerages may not seek repayments from their clients that owe them money. Why is that? I assume the contracts they sign are iron clad, is it just that the losses are so large that their clients couldn't repay it?
Consumer contracts (vs business ones) are rarely "iron clad". The idea you can go to someone and say ok you know you were doing some gambling with a stake you paid me, well you lost and now I want $200k is not going to go down well.
Many of these clients are from all over the world. It's probably going to be impossible to enforce a claim on the liability. By keeping the clients at least they keep their ongoing business, which is going to be necessary to repay this loan - maybe they could charge clients a % of their monthly profits for the privilege of not having their accounts closed? It will be very interesting to see what happens.
Once it became clear the ECB was about to take the reins off when it comes to QE, the Euro was guaranteed to sink substantially, leaving the Swiss forced to foot the bill on a pegged hole that would be theoretically infinite (only theoretically). At the very least, the Swiss National Bank was going to partake in a mult-billion dollar losing effort - for no good reason - to try to keep the Franc capped against the Euro, while facing off against one of the most powerful central banks in the world. The only question then would be how much the Swiss would lose between now and capitulation later.