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Retail Firms Hike Margins Requirements Ahead of Brexit Vote

Retail firms increasing margin requirements to their clients
is one further consequence of the imminent Brexit referendum vote.

Global derivatives trading provider ThinkForex says it will increase
margins on all GBP crosses and the UK stock index to 5%.

The new requirements will become effective from market open
Sunday June 19 until rollover on Monday June 27, ThinkForex says in a press
release, adding, “However, if volatility continues, the changes maybe be
extended.”

Similarly, SaxoBank “raised margin
requirements to 7% from 2% for private clients for all major GBP pairs”,
SaxoBank’s head of FX strategy John Hardy says, adding that “it will be higher
for larger exposures” without specifying a figure.

“There will
inevitably be some normalisation of margining once the event passes and the
market settles,” he says, adding that it is unclear at this stage “when and
whether it fully reverts back to the old level or in steps over time.”

“We have been monitoring the implied volatilities
traded in the FX Options market over the past two months which have
led us to the conclusion that a Tier 1 margin level for GBP of 7% is rational,
quantitatively fair, appropriate and prudent” SaxoBank’s head of market Claus
Nielsen adds.

In addition, to
support its clients “Saxo is promoting the use of long
options which are unleveraged, can be used to express both long
and short volatility and directional views” he says.

“They can
also be used to achieve better portfolio protection compared to traditional stop-loss
orders,” he says.

Retail
platform Oanda is also moving the maximum leverage available to 5% on GBP pairs
and to 2% on EUR pairs from market close on June 17 until market close on June
24, when the affected pairs will return to prior leverage levels.

Meanwhile, IG
says it is increasing the FTSE 100 starting margin rate to 1.5% from 3pm London
time on Friday, June 17. At the same time, it is raising the
starting
margin rates on all GBP currency pairs to 3% and the starting margin rates on
all European indices and EUR currency pairs to 1%. Moreover, it is hiking the
starting margin rates on major UK shares and all UK sectors to 10%.

It says additional increases will
follow on June 22, without specifying the values.

GBP currency pairs margin rates
were at 0.5% before the increase.

“The rates are based on a variety of factors such as levels
of historic volatility and liquidity of each instrument and the wider
macro-economic backdrop,” says an IG spokesperson.

“Given the potential for heightened market volatility as a
result of the EU Referendum, we will be undertaking a programme of increased
margin requirements across a selection of markets to provide additional
protection for clients,” he added.

Market Fears SNB-like Reaction

Concerns that a situation similar to that prompted by the
Swiss National Bank’s decision back in January 2015 might repeat over the
Brexit vote seem to be driving the move.

“Back
in January, the decision of the Swiss National Bank to stop pegging the Swiss
franc to the euro was a wake-up call for traders and the revised margins are in
the best interest of our clients,” says ThinkForex’s CEO Nauman Anees in the
statement.

SaxoBank’s Nielsen agrees that “this is about being
able to withstand large ‘flash moves’ – not a fundamental move, but a move like
the CHF, where we experienced an extreme move but very short period of time as
a direct result of market illiquidity.”

In addition,
as one retail FX provider explains, there is a danger that “banks will panic
and spreads go massively wide. Clients run the risk of getting stopped out if
they are too highly leveraged – we don’t want that to happen.”

“We’ve
already seen banks widen prices on data, such as US non-farms and UK employment
– some banks already go to 40 or 50 pips or post indicative prices only. It could
be even worse on the night – these are the games banks lay, plus of course they
use last look,” the retail FX provider adds.

Expectations
continue to diverge on the result of the vote.

“Brexit
qualms have increased the anxiety amid traders, and recent polls which are
indicating that the Leave group are gaining the lead is adding fuel to the fire,”
says ThinkForex’s chief market analyst Naeem Aslam.

Nevertheless,
ThinkForex is still expecting the “Remain” side to prevail.

“Our
house view is that there will be no Brexit; however, if the polls are correct
and Brexit does take place, there may be a heavy punishment for the GBP,” he
says. “We think that sterling could fall all the way to 1.29 level against the
dollar. However, if there is no Brexit, the currency could bounce to 1.60.”

–Beatrice Bedeschi

 beatrice@profit-loss.com

Twitter @Profit_and_Loss

 

Beatrice Bedeschi

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