Brexit: FinanceFeeds investigates how FX companies will navigate Britain’s first ever EU referendum

Just under 2 weeks are remaining before the population of the United Kingdom casts its vote in an unprecedented referendum, the results of which will decide the future of the nation’s membership of the European Union. The referendum is scheduled to take place in the United Kingdom and Gibraltar on 23 June 2016, and is […]

How will FX brokers avoid Brexit black swan volatility?

Just under 2 weeks are remaining before the population of the United Kingdom casts its vote in an unprecedented referendum, the results of which will decide the future of the nation’s membership of the European Union.

The referendum is scheduled to take place in the United Kingdom and Gibraltar on 23 June 2016, and is a very important milestone in British and European history, whichever way the voting goes.

Currently, the opinion polls that are being closely monitored by the electorate as well as commercial enterprises and government officials alike, show that those currently in favor of Britain’s exit from the European Union, and those who would prefer the country to retain its membership, are almost equal in numbers, making the outcome very difficult to gauge, even at this close stage.

Membership of the European Union has been a topic of debate in the United Kingdom since before the country joined the European Economic Community, known in those days as the EEC, or the “Common Market, in 1973.

Those who favour a British withdrawal from the European Union, commonly referred to as a Brexit which is a portmanteau of the words British and exit, are concerned that being a member undermines national parliamentary sovereignty, while some in favour of membership argue that in a world with many levels of supranational organisations any theoretical loss of sovereignty is more than compensated by the benefits of membership of the EU. Indeed, many financial sector senior executives in London are firmly in this camp, one particular example is former Conservative Party Treasurer Peter Cruddas, CEO and Founder of CMC Markets.

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Andrew Saks-McLeod with Britain’s CMC Markets, led by pro-Brexit CEO Peter Cruddas

Mr. Cruddas has personally donated £1 million to a campaign that encourages Britain to leave the European Union, and is a regular commentator in mainstream news sources to this effect.

In addition, British voters who want to leave the EU argue that it would reduce pressure on public services, housing and jobs, as well as save billions in EU membership fees. Included in the ethos of those who wish Britain to renounce its European Union membership are the thoughts that it would allow the UK to make its own trade deals; and free the UK from EU regulations and bureaucracy that they see as needless and costly.

Those who would like Britain to remain in the EU argue that leaving the EU would risk the UK’s prosperity; diminish its influence over world affairs; jeopardise national security by reducing access to common European criminal databases; and result in trade barriers between the UK and the EU. In particular, they argue that leaving the EU would lead to job losses, delays in investment coming to the UK and risks to large and small business.

Of course, a geopolitical event of such magnitude is very likely to have an effect on the currency markets, especially bearing in mind that the GBP and EUR are two of the most traded major currencies in the world, and the British pound has for a very long time been the world’s most valuable currency.

In light of such potential volatility, FinanceFeeds spoke to senior executives within major retail FX companies as well as those providing prime brokerage services, in order to assess the risk management measures that will be put in place by firms in order to avoid exposure to highly volatile markets which in turn could create negative account balances.

Here is what they said:

1: Invast Global, Australia.

In order to ensure that traders can be assured peace of mind, FinanceFeeds spoke to several prominent FX brokerages in order to ascertain their position on ensuring a smooth and continuous trading environment during the period before and after the referendum.

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39 years of experience: Invast senior executive Geoff Last

Today, FinanceFeeds spoke to Geoff Last, Director of Institutional Liquidity Sales at Invast Global in Australia.

Mr. Last has 39 years of experience in the bank and non-bank institutional FX industry, and explained this morning “We have managed to take steps with regards to the British referendum.

“Firstly we have raised the margins for GBP and its crosses for which clients are permitted to trade. Secondly we have also restricted Net Open Positions on these pairs. Both these temporary measures are for the protection of the client and also our company risk. Finally we believe we have the experienced staff, expertise and technology in place to monitor this event” – Geoff Last, Director, Institutional Liquidity, Invast Global – Australia

Most certainly, with an event that is placed on the calendar and allows planning, the raising of margins and restriction of net open positions is a prudent measure indeed and therefore those trading at the time of the referendum should certainly consider the risk management policy of the company with which they trade.

2: ADS Securities, London

ADS Securities pointed out three important factors to consider when trading pre and post referendum.

Whether traders have decided on their strategy or will be sitting out the Brexit vote, one thing is certain there is great potential for market volatility. We have been advising clients to make sure they have access to the appropriate risk management tools. Before trading Brexit they need to check three main things:

1 Is your broker well regulated and does it have the capital to handle a large market move. There is no point you trading the right strategy if your broker does not have the reserves to cover your trades.

ADS Securities: Dealing with the Brexit black swan
ADS Securities talks Prime Brokerage and a strong capital base at iFXEXPO, Cyprus

2 Make sure you have all the necessary stop/ losses in place and that you are on hand to react to the market. Using a virtual private server is always a sensible option so that you know you will be in control of your positions

3 Don’t over leverage. Margins may change and you do not want to be faced with a margin call if the markets start moving very quickly

Finally, set your strategy and stick to it. Many very experienced traders will sit out Brexit and return to the market when they know and can read the trading patterns.

ADS Securities has distinct experience in this matter, as the company operates a Prime Brokerage from London and therefore understands counterparty credit risk as well as the requirements of brokerages and traders. Indeed, caution is paramount and ADS Securities point about many traders simply keeping positions closed during the referendum period is certainly something that we concur with.

3: FXPRIMUS

FXPRIMUS maintains responsibility to clients, increases margin on Sterling pairs by 2%

FXPRIMUS Head of Dealing Ioannis Gerousis today explained to FinanceFeeds: “Business will continue as usual for trading on the Sterling pairs, except that the company has decided to increase the required margin on Sterling pairs to a minimum of 2%, in order to help manage risk during this particularly volatile period. We are monitoring the polls on continuous basis, and our experts remain vigilant to pickup any development that might occur. ”

Forex Virtual Reality Trading
Helen Astaniou, FXPRIMUS

Indeed, it is clear that the increase in margin requirements by brokerages wishing to safeguard themselves and their clients against any extreme volatility is a common direction against those with prudent risk management controls in place.

4: Hargreaves Lansdown

Hargreaves Lansdown is Britain’s largest retail financial services company, having grown from a small brokerage firm in Clifton, Bristol in the 1980s, to today’s electronic brokerage. One of its founders, Peter Hargreaves is openly pro-Brexit, and is known to be a very astute member of Britain’s financial services community.

Hargreaves Lansdown has actually sent an email to its customers regarding the period immediately before and after the referendum, as follows:

Dear Customer

On Thursday 23 June, the UK will vote on whether or not to remain a member of the European Union. This is likely to cause volatility across global markets, so we will be making some changes to our margin requirements in advance.

At 3pm on Friday 10 June, the starting margin rates on the FTSE 100 and all GBP currency pairs will increase to 1%.

Additional increases will follow on Friday 17 June and Wednesday 22 June, which will affect these and other markets. We’ll send you further emails detailing these changes nearer the time.

If you have open positions during the affected period, please be aware that margin requirements to keep those positions open could rise. We recommend that you monitor positions carefully and maintain a sufficient account surplus throughout this period, particularly over weekends and before major announcements.

Speaking today to FinanceFeeds, Hargreaves Lansdown explained “With regard to HL Markets, which is a white labelled service offered via IG Group, the company explained “We are an execution only service so we are not doing anything different to what we would normally.”

“As a business generally, we know that 25% of our clients are holding investment decisions until the result of the EU referendum is known. A Remain vote could see a relief rally in currency and stock markets, a Leave vote could see further volatility. We are ensuring we have additional staff available from the 24th June in case we see higher than normal investor activity” – Danny Cox, Hargreaves Lansdown

Joining CMC Markets Plc (LON:CMCX) CEO and founder Peter Cruddas in the pro-Brexit school of thought is Peter Hargreaves, who founded the £6.9 billion Bristol-based Hargreaves Lansdown PLC (LON:HL) alongside Stephen Lansdown in 1981.

In March this year, Mr. Hargreaves spoke out about his perspective on how a post-Brexit Britain would look, likening it to Singapore in the 1960s.

Hargreaves
Danny Cox (right) with FinanceFeeds at Hargreaves Lansdown’s head office in Clifton, Bristol

He recently stated “I am firmly convinced that the day hopefully, we decide to leave, that little bit of insecurity, that little bit of unknown will be an absolute fillip to everyone.”

Mr. Hargreaves continued

“When Singapore became independent from Malaysia, that little insecurity that they were no longer part of Malaysia, it was an inspiration. I honestly think that would be good for us too.”

In a recent meeting with FinanceFeeds, Hargeaves Lansdown demonstrated its self-developed Vantage service, which is an in-house developed proprietary platform that offers customers a wide selection of option choices such as spread betting and CFDs, ISA’s, SIPPs as well as corporate and government bonds, ETF’s, Investment Trusts. The company considers its strong customer service and safety of client funds to be top priorities.

Trading in the instruments that the company provides is manageable via the Vantage system which holds different types of investments together in one place with one valuation and dealing service, and whilst CFDs and spread betting are very much part of the firm’s product range and are offered under the HL Markets brand, Hargreaves Lansdown has 14% of the UK’s market share in ISAs.

The company’s CEO is one of Bristol’s most successful commercial leaders. 43-year old Ian Gorham, whose salary is £500,000, superseded Mr. Hargreaves in 2010 and has maintained the company’s incredible financial strength, attracting talent from London at senior level, exemplified by IG Group CFO Christopher Hill having joined the company as CFO in the last quarter of 2015.

5: ThinkForex

ThinkForex takes a close look at how to prepare for the referendum – reduces margin on GBP pairs

nauman
International experience: Nauman Anees, CEO, ThinkForex

Nauman Anees, CEO and co-founder of Think Forex today explained to FinanceFeeds “The key differences between Brexit and SNB are that Brexit is planned and SNB was not , Brokers have had plenty of time to prepare this time and test their risk management functions.”

“ThinkForex will  reduce margin on GBP pairs and make sure we are actively in communication with our clients as we near the date. In addition to that we are also looking to adjust our margin call and liquidation levels for our retail clients to adjust for market volatility ahead of Brexit” concluded Mr. Anees.

6: FXCM

FXCM takes solid risk management measures, considers little material impact should Brexit occur

FXCM believes that there is a chance of disruption and illiquid conditions developing in the forex and CFD markets during the coming weeks due to the upcoming British referendum on June 23, 2016.

In an effort to mitigate customers from the possibility of unexpected currency movements, which may potentially result in some losses, FXCM will be making updates to its client offering.

Some changes include:

· Adjusting margin requirements on a number of pairs and instruments.
· Advising clients to monitor their usable margin closely
· Delisting certain CFD instruments as necessary

Additionally, the FXCM Risk Committee will be closely monitoring and hedging the Company’s GBP exposure.

“If Brexit were to occur, based on our current analysis, in the short term there would be little material impact on FXCM. Over time this could change, and all risks and uncertainties which we currently believe may materially and adversely affect the company, our future business or results of operations can all be found in our 10K filed with the SEC on March 11, 2016” stated FXCM.

Platform and technology vendors: cTrader helps brokers navigate volatile Brexit period

This week, FinanceFeeds spoke to James Glyde, Business Development Manager at Spotware Systems, which develops the cTrader retail multi-asset trading platform, who explained “We have recently released some new functionality in cServer/cBroker in preparation which allows brokers to change margin requirements per symbol and per group to both open positions and/or new positions. cBroker is incredibly intuitive, such settings can be shared and applied to hundreds of groups in just a few clicks making their risk management seamless at this time.”

james
Technological perspective: James Glyde, Spotware Systems

”The flexibility means that the broker doesn’t just change GBP crosses for all clients to 2% they can change this to; for example 4% for certain groups used for traders with balance in excess of $100,000 and 5% for groups used for traders with a balance in excess of $200,000” explained Mr. Glyde.

“Also, cBroker is incredibly intuitive, such setting can be shared and applied to hundreds of groups in just a few clicks” he said.

With this approach, brokerages wishing to make provision for potential volatility can do so with very little input required, and those wishing to ensure that their policy of increasing margin and safeguarding clients can be easily implemented can consider the functionality being provided by their software vendors.

All photography copyright FinanceFeeds

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