On 23 June 2016, the United Kingdom EU Referendum (“Brexit” vote) will commence, marking potentials of volatile market movements, including possibilities of significant price gaps and periods of illiquidity. Leading up to aforementioned event, Saxobank initiated plans to increase margin requirements of GBP pairs and UK stocks in order to protect their clients.
Periods of illiquidity where spread between bid and ask price are widening is a bad sign to every trader, especially when they're on leveraged account, as it can completely drain out clients deposit in a span of relatively short time.
Following Details On Increased Margin Requirements
Saxo Bank Head of Markets Claus Nielsen, elaborated on Saxobank's plans to protect clients around the date of Brexit poll, "We are also 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, quantitatively fair, appropriate and prudent."
On UK stock and indices, he added, "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."
Lastly, he commented on clients' security, "To be very specific, 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. Just think about the spread in GBPUSD after the close of the vote at 10 pm UK – a 3-6% between bid and ask can for sure not be ruled out."
Saxobank expected a return to normal levels and operation depending on market conditions following the UK referendum.
Implications And Suggestions
Saxobank's initiation to raise their margin requirement for every GBP pair and UK financial instruments may create a trend where other forex brokers will adopt similar measures leading to June 23 Brexit vote.
As for clients, Saxo experts suggests to place relevant pending orders well in advance of the referendum, as availability of liquidity for new trade requests and orders can vary significantly during periods of market illiquidity.
They also stated on their email to clients, "We would also like to stress that Stop Loss orders are not guaranteed to be filled at your order level: Stop orders are converted to Market orders once triggered, and dislocations in available liquidity could result in significant slippage on Stop orders."