Margins Raised Ahead of Brexit Vote

Shanny Basar

Firms are increasing their margin requirements in anticipation of increased volatility ahead of the UK referendum this month on whether to leave the European Union.

The UK will vote on June 23 on whether to leave the EU, or “Brexit.”

Broker PhillipCapital UK, part of Singapore’s PhillipCapital group, said in a statement that it will be increasing margins across all instruments on June 12 and again on June 19. Sterling currency pairs and sterling-denominated instruments will have margins raised to 10%, with margins on other instruments raised to 5%.

Sean Tan, head of derivatives trading at PhillipCapital, said in a statement that if the UK votes to leave the EU, markets could experience unparalleled volatility for a period of time.

“If the events of last January taught us anything, it was that markets can be extremely volatile when a major event occurs,” added Tan. “When the Swiss National Bank removed its Euro/Swiss franc peg, the Swiss franc went from 1.20 against the euro to 0.975 almost without trading. Such an event can present an extremely risky and worrying time for any investors trading such markets.”

The margin increase is temporary and will return to normal levels depending on market conditions following the vote.

Courtney Gibson, head of trading at retail foreign exchange broker OANDA, said in an email to Markets Media that increasing margin requirements can reduce the financial risk associated with adverse market moves on clients’ positions.

“The so-called Brexit has the potential to introduce significant swings in sterling and euro currencies around the time of the vote; having analyzed the potential volatility, we decided that this protective measure was a prudent move to help our clients avoid unwanted margin closeouts during potentially turbulent movements,” added Gibson.

Luciano Siracusano III, chief investment strategist at ETF issuer WisdomTree Investments, said in a blog that if voters choose to stay in the EU then sterling and the euro will rally against the US dollar, along with UK and European stocks.

However if voters choose Brexit, Siracusano believes the pound will continue weakening, and exporters and financial stocks throughout the UK and Europe would likely see a headwind develop over the next two years, as lawmakers and regulators translate the result into policy. He said as the UK currently runs a current account deficit, it is considered a net debtor to the rest of the world so frictional costs to attract foreign capital may increase, potentially making it harder for the UK to finance its deficit.

“A wave of reregulation would undoubtedly swoop over the financial industry as it relates to the UK and Europe, halting and complicating new and existing business,” added Siracusano. “The duration and effects of this reregulation process are impossible to forecast and, more likely than not, will have negative effects on the UK financial sector in aggregate, with the potential for a residual impact on European banks as well.”

He continued that if Brexit wins the referendum, it remains to be seen which stocks and which sectors will bear more of the relative pain from the major disruption in how the UK manages its economic relations with the rest of Europe. However, if UK voters decide to stay in the EU, UK and European stocks are expected to rally as some discounting has already occurred.

S&P Global Ratings has introduced a Brexit Sensitivity Index and said Ireland, Malta, Luxembourg, and Cyprus are most susceptible to any trade and migratory aftershocks from Brexit out of a survey of 20 countries.

The ratings agency’s Brexit Sensitivity Index measures goods and services exports to the UK compared to these economies’ domestic GDP, bidirectional migrant flows, financial sector claims on UK counterparties (including off balance sheet claims), and foreign direct investment in the UK.

Ireland has a shared history and common border with the UK and the sum of Irish residents in the UK and vice versa totals 17.2% of Ireland’s population according to S&P.

“Nevertheless, we would expect that Ireland’s highly flexible economy would manage to reorient trade toward even larger trading partners (such as the remaining EU and the US) in the unlikely event that an exited UK would not reach new terms on trade access to the EU after its departure,” added S&P.

The ratings agency also flagged Switzerland’s exposure to the UK due to large financial services subsidiaries booking substantial trading and derivatives positions in the UK.

“While global Swiss banks are already cutting back their derivatives and trading book exposures to the UK, at 65% of Swiss GDP in 2015 the banks’ financial sector claims on an ultimate risk basis (including off balance sheet exposures such as derivatives and guarantees) remain the highest among all 20 sovereigns in this survey with the exception of Luxembourg,” added S&P.

The ratings agency highlighted the Swiss Franc, alongside all of the Nordic currencies, as particularly vulnerable to flight-to-quality appreciation pressures in the event of a vote to leave the EU.

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