Key Points

• Target redemption forwards (“TARFs”) are complex foreign exchange products. TARFs attract investors with promises of “enhanced” exchange rates and fixed-income-like returns. However, they limit profits to a set amount while exposing clients to unlimited downside losses.
• TARFs have a history of being at the center of mis-selling scandals, most recently at UBS in Switzerland.¹ Banks have paid billions in fines and settlements. They failed to adequately inform clients, about the full extent of the risks. This particularly affected small and medium enterprises (“SMEs”) and less sophisticated investors.
• The recent sharp depreciation of the U.S. Dollar has triggered escalating and potentially compounding losses for TARF investors. Affected parties may include retail clients and SMEs looking to hedge currency risk. This has highlighted the product’s highly risky and one-sided nature. Thanks to large losses, there may be large mis-selling claims.
• Accurate damages calculations depend on a thorough assessment of liability. One must conduct a suitability analysis to determine whether a TARF was appropriate for a particular client. To establish a mis-selling claim an economist must identify an appropriate but-for scenario to determine fair compensation.

What Are TARFs?

TARFs are complex foreign exchange products that offer enhanced exchange rates. Banks market these products to retail clients and corporations as alternatives to standard forwards or fixed income products. In return for this enhanced exchange rate, TARF investors face a highly skewed risk profile. Once a preset profit threshold (the “target”) is reached, any further upside is cut off. However, if the market moves unfavorably, the investor remains locked into a losing position. The potential losses that are effectively unlimited.²

The diagram below shows the payoff of a TARF contract. If the enhanced rate is better than the spot rate, the investor profits—up to the target redemption amount. But if the spot rate falls below a set threshold, the investor must keep transacting at a loss. TARFs frequently use leverage. This makes losses more severe. Critically, if a TARF was used for hedging, hitting the target redemption cap early can leave the investor suddenly unhedged just when protection is most needed.

Figure 1 Hypothetical Payoff of a TARF

Recent Market Turmoil And Losses Incurred

Exotic financial products like TARFs are traded over the counter (“OTC”) without central clearing and public reporting. Despite this opacity, there is evidence showing that the TARF market is large and expanding quickly, particularly among retail investors who may not fully understand the risks. In 2024, UBS reported a 30% year-over-year increase in retail trading volumes for “accumulator” products, which include TARFs, and a 40% rise in the number of clients trading them.³ The bank’s annual report also showed that its exposure to foreign exchange options—often linked to these products—grew by more than 20% during the same period.⁴

These products are inherently complex, risky and have been associated with mis-selling concerns. As a result, they have faced growing regulatory scrutiny and enforcement across the globe. These investigations and court cases have led banks to pay billions in fines and settlements.

On April 25, 2025, reports revealed that UBS had sold a variety of TARFs to retail clients who are now facing major losses.⁸ Further investigations exposed that the product had been heavily marketed to retail clients. These clients may not have understood the risks of the product they were investing in.⁹ It was later reported that the losses ran into the hundreds of millions of CHF.¹⁰

Many other TARF investors now likely face the same substantial losses caused by sharp movement in the FX market. Since January, the USD has fallen over 8 percent against the CHF, GBP, and EUR, well beyond typical volatility ranges. With major banks like Morgan Stanley, JPMorgan, and Goldman Sachs forecasting further dollar weakness, potentially another 9% decline, TARF clients may see compounding losses as these structured contracts continue to reset.¹¹

The diagram below illustrates a common CHF/USD TARF product, like those offered to UBS retail clients.¹²While it initially offered a favorable enhanced exchange rate, the potential for client losses was significantly greater than any possible profit. When the market rate moved unfavorably, clients faced escalating losses – potentially hundreds of thousands or even over a million CHF, as seen in illustrated scenarios – while their maximum profit remained capped at $10,000.

Figure 2 Illustration of Profit and Loss for a CHF/USD TARF Investor 

Damages Estimation

As illustrated above, TARFs are complex financial contracts that are sold privately. They’re often pitched to small businesses and individual investors as a way to protect against currency fluctuations. But in reality, these products are full of hidden risks and hard-to-understand features. Many people who buy them don’t fully grasp how they work — and often find out too late that they don’t actually provide the protection they expected.

One of the biggest problems with TARFs is that they give the appearance of being a hedge (a safety net against currency moves), but that protection disappears once certain limits are reached. This can leave investors unexpectedly exposed to big losses. Because of this, these products create fertile ground for mis-selling claims.

When someone brings a claim that a TARF was mis-sold, experts assess the financial damage by comparing two scenarios:

• What actually happened (how much the investor gained or lost on the TARF); and,
• What would likely have happened if the investor had used a safer, simpler product that matched their needs.

There are a few common ways to estimate damages:

• Full refund of losses: If the investor was clearly not suited to a risky product like a TARF (for example, based on their financial situation or experience), it may be assumed they would never have chosen it if the risks were explained properly. In this case, they may be entitled to all their losses back.
• Comparison to an alternative: The investor’s damages can be measured against how they would have done with a simpler, lower-risk product (like a forward contract, currency future, or bond).
• Reimbursement of losses and time value: If the investor had to exit the bad product and enter a more suitable one, they may be reimbursed not just for their financial losses but also for the cost and effort of switching.

¹ https://www.reuters.com/business/finance/ubs-talks-with-clients-over-fx-derivative-losses-trump-volatility-sources-say-2025-05-16/

² Core features of TARFs include: a) no upfront premiums; b) an initially favorable (“enhanced” or “strike”) exchange rate; c) a cap on total profit (the “target redemption” amount); and d) downside risk, often including leverage.

³  https://www.risk.net/awards/7960357/currency-derivatives-house-of-the-year-ubs

⁴ https://www.sec.gov/ix?doc=/Archives/edgar/data/0001610520/000161052025000023/ubs-20241231.htm

⁵ https://www.fca.org.uk/consumers/interest-rate-hedging-products

⁶ https://www.bloomberg.com/news/articles/2024-07-12/deutsche-bank-settles-500-million-spanish-fx-mis-selling-case

⁷ https://www.fi-desk.com/deutsche-bank-fined-again/

⁸ https://insideparadeplatz.ch/2025/04/25/ubs-superreiche-mega-verlust-mit-dollar-strukis/

⁹ https://web.archive.org/web/20250511032858/https://www.tagesanzeiger.ch/trump-strafzoelle-koennten-vermoegen-bei-der-ubs-vernichten-614074928215

¹⁰ https://www.reuters.com/business/finance/ubs-talks-with-clients-over-fx-derivative-losses-trump-volatility-sources-say-2025-05-16/

¹¹ https://finance.yahoo.com/news/morgan-stanley-sees-dollar-falling-012635726.html

¹²  This hypothetical contract has a maximum notional of $9m and a maximum number of 30 transactions, with a payment frequency of every two weeks.