How will FX brokers avoid a Brexit black swan volatility? – Part 2, Hargreaves Lansdown

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? Part 2

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.

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.

Hargreaves Lansdown takes pre-emptive action and notifies all clients of its policy

Britains largest financial services company Hargreaves Lansdown has taken the step of advising all of its customers about margin changes in the advent of the referendum on Britain’s membership of the European Union.

The company stated to all customers:

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 Bristol-based £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.

He explained to the BBC on Friday “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.”

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.

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.

Photograph: Clifton Suspension Bridge, Clifton, Bristol, England.

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