Some FX brokers choosing not to alter leverage and margins during Brexit
Many brokerages are reducing leverage and increasing margin rates as the EU referendum approaches. What about the execution model of those which make no changes?
During the last week, FinanceFeeds has reported the measures being taken by many of the FX industry’s most significant brokerages, many of which are taking prudent measures in order to ensure that their businesses and their clients are not exposed to negative balances as a result of any market volatility that may ensue during the period immediately before and after the UK referendum on European Union membership that will take place on June 23.
The vast majority of companies in the retail sector are raising their margin rates and ensuring that leverage is kept down, and liquidity providers are also preparing their approach by taking a look at how to manage risk during a period of potentially volatile markets that could affect order flow.
In some cases, brokerages are advocating the trading of options with no leverage during the referendum period, and others are advising to close positions and wait until the result is known and any resultant volatility subsides somewhat.
There are, however, some brokerages which are making no changes at all to their leverage or margin rates, two particular examples that are actually advertising this fact publicly being EXNESS and Forex4You.
This year, one of the largest discussions among senior executives in the retail sector of the FX industry has been the execution model which is continuing to be a major consideration for brokerages as Tier 1 banks have restricted credit substantially over recent months.
The astute technology providers which connect MetaTrader 4 platforms to aggregated liquidity have begun to introduce new solutions which are designed to foster better prime of prime relationships and ensure best execution for firms that wish to continue to provide direct market access to retail clients at a time during which the largest interbank FX dealer in the world, Citigroup, has stated that the potential default is 56% within OTC derivatives counterparties.
Initiatives such as this are what drives the industry forward and innovates the entire trading experience as, despite the ‘credit crunch’ that has ensued due to conservative counterparty credit risk measures by major banks.
Not all companies are concerning themselves with these considerations, however.
FinanceFeeds today spoke to Fred Gewirtz at risk management specialist ThinkLiquidity, “I have seen this too. For an event such as this one, where the outcome is uncertain, we feel the first piece of the puzzle is to protect the house. There is money to be made, but you need to protect your business first and foremost.”
“My opinion is that they are probably warehousing these trades. These brokers have a large enough risk appetite to handle the swings that may happen with this event” said Mr. Gewirtz.
A senior executive in the institutional FX sector in London today said “The reason that I think most firms that are not altering leverage and margin requirements is that many of them have clients which are low value depositors and therefore they want to provide a warehouse brokerage service with high leverage, with the outside market factors not being relevant.”
“It is like an arms race in some cases” he said. “For example, if there is a trader in an unregulated jurisdiction that wants to have 1:1000 leverage and the broker does not want to lose the client, they will warehouse the trades and continue. I will add that most traders that willingly accept high leverage, even in times of less volatility, are often unsure of what they are accepting.”
Indeed, there is nothing wrong with operating a b book per se, as long as correct market pricing is being followed an emulated by the dealing desk according to market pricing provided by the liquidity provider, and indeed can often be a very effective method of managing risk, however in cases during which very high market volatility can occur and high leverage and low margins are still being offered, this should be an indicator as to which firms are following the market price feeds and which are not.