Brexit: Saxo Bank’s Claus Nielsen talks unleveraged options, margin requirements and exact percentages

This week is most certainly going to be one of the most interesting weeks with regard to currency market volatility across the entire annuls of history.

For the first time since becoming a member of the then-named European Economic Area (EEA), or as it was known, the Common Market in 1973, and subsequently a member state of the European Union with no consultation of the British public, a long-awaited referendum is about to be held.

Anticipation is high in the advent of this potentially landscape-changing geopolitical event, and electronic trading companies are taking a comprehensive view, looking at all considerations that may affect the currency markets if Britain leaves the European Union, or remains a member state.

Today, Claus Nielsen, Head of Markets at Saxo Bank, detailed the company’s policy and astute navigation through the period immediately before and after the referendum.

Saxo Bank’s role as an enabler of trading and investment activity comes with responsibility. This responsibility includes providing a wide range of trading options and an unbiased guidance around geopolitical and risk events that have the potential to affect the market and therefore the available liquidity and ultimately performance of client portfolios. Our approach to such events is three-pronged – characterized by transparency, rationality and prudence.

The UK referendum on EU membership taking place on 23 June is a significant market event whose outcome may lead to disorderly markets impacting pricing and liquidity of certain assets. As a result, Saxo is doing its utmost to educate its clients on the range of options available to them to ensure smooth execution.

We have launched a number of initiatives including a UK EU Referendum webpage to support our clients with views and strategies in the run-up to and following the event. Additionally, we are actively promoting the use of long options which are unleveraged and can be used to express both long and short volatility and directional views.

We are offering our clients full transparency on the temporary increase in margin requirements for GBP. We have been monitoring the implied volatilities traded in the FX Options market over the past 2 months which have led us to the conclusion that a Tier 1 margin level for GBP of 7% is rational and quantitatively fair.

We are applying the same analysis methodologies when looking at equity-related products, specifically CFDs on UK stocks and indices, and will be applying an 8% margin on UK100 and UK250MID.

Going into an event of this magnitude with less than a 5-7% margin requirement on any UK margin instrument does not seem responsible to us and gives the retail client a wrong impression of the underlying volatility and risk.

I am glad to note that we were one of the first to announce such changes and have informed clients well in advance of the event. As soon as market conditions allow it, we plan to return margins to their normal levels.

We thrive when our clients thrive and therefore making sure that our clients are properly informed and able to make prudent choices as we enter in the crucial stage of the referendum is essential.