How will FX brokers avoid Brexit black swan volatility? – Part 6, FXCM
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 […]
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.
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.