How will FX brokers avoid a Brexit black swan volatility? – Part 1, Invast Global Australia

Just over two weeks is all that remains before the citizens of the United Kingdom cast their votes as to whether the nation in which they reside should remain a member state of the European Union, or whether it should go it alone as an independent sovereign nation. No referendum was held when Britain agreed […]

How will FX brokers avoid a Brexit black swan volatility?

Just over two weeks is all that remains before the citizens of the United Kingdom cast their votes as to whether the nation in which they reside should remain a member state of the European Union, or whether it should go it alone as an independent sovereign nation.

No referendum was held when Britain agreed to an accession treaty on 22 January 1972 together with the EEC (European Economic Community) states, Denmark, and Ireland, or when the European Communities Act 1972 went through the legislative process. Britain joined the European Economic Community on 1 January 1973, along with Denmark and Ireland.

Throughout the 1980s and 1990s, discussions had been held on allowing a referendum to take place, however here we are 44 years after Britain joined what was then the EEC, with votes about to be cast.

Today’s economic and commercial landscape is considerably different to that of 44 years ago. Britain is a financial powerhouse, home to the largest interbank FX trading center in the world by a considerable margin – just 6 banks, all located in Canary Wharf in East London, account for over 46% of all global interbank FX order flow, and the City of London is an ultra-modern, highly technologically advanced financial powerhouse, hosting the majority of the institutional FX companies and prime of prime brokerages which power the non-bank electronic trading industry for the entire world.

Britain’s pound is the most highly valued currency in the world by a considerable margin, and has been for many years.

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Such an important mainstay of the European economy, Britain is a shining light of ingenuity and financial prowess, therefore, the potential outcome of the referendum on what has been dubbed ‘Brexit’ from the European Union is a matter for all brokerages and traders to concentrate on.

Indeed, a potential exit from the European Union could be the cause of high volatility in the FX market, as such an important country goes it alone, just as remaining in the European Union may lead to volatility as the European sovereign debt would still present a burden to the British Chancellor of the Exchequer’s balance sheet.

In 2015, the Swiss National Bank removed the 1.20 peg on the EURCHF pair, sending the currency markets into a sudden period of unprecedented volatilty, exposing brokerages to negative client balances and in some cases causing their insolvency.

The British pound has never been pegged to the Euro, however a similarly volatile situation could occur in the days following the result of the referendum.

How does this affect you?

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.

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.

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