Lower volumes really are worse than black swans: Saxo Bank considers reversing high margin requirement

In accordance with an editorial by LeapRate yesterday, evidence is beginning to emerge that FX companies concur that periods of low volatility and flagging volumes are costly, and potentially just as much, if not more cause for concern that one-off black swan events.

Today, just a matter of hours after LeapRate made the comparison between the widespread industry reaction to the Swiss National Bank’s removal of the 1.20 peg on EURCHF on January 15 and the subsequent lack of reaction to the flagging volumes which the entire industry is now experiencing, Saxo Bank is considering a remedy for the low volumes.

This remedy is intended to take the form of a reversal of the firm’s decision in January to demand higher margin payments from clients in order to mitigate exposure to negative balances should a further black swan event such as that of January 15 occur again.

In light of low volumes during February, which most industry participants have experienced, Saxo Bank being no exception – indeed the firm’s February volumes are the lowest for two years – should the company choose to reverse the higher margin requirements imposed in January, it makes a clear case that low volumes are equally as, if not more, challenging than a one-off event that causes extreme market volatility.

“Saxo intends to be much more flexible when it comes to margin changes,” Claus Nielsen, head of the Danish bank’s markets unit, said in an e-mailed reply to questions from Bloomberg. That means clients using borrowed funds to trade can expect to put down less collateral when volatility is low and more when volatility rises, he said.

“We still expect firm volatility over the coming months,” Mr. Nielsen said. “It is not that we have a crystal ball, but investors should be made aware of the risks.” Saxo responded to the market chaos that followed Switzerland’s decision to abandon its exchange-rate cap by repricing a number of franc trades. Chief Financial Officer Steen Blaafalk said in January Saxo faces legal action as a result of its decision

According to a report by Bloomberg, Saxo Bank has received a series of complaints from clients challenging its decision to revise prices on Swiss Franc trades made on January 15.

In a letter to the Danish financial markets regulator dated February 9, Saxo Bank stated that it was trying to avoid being sued when it continued accepting Swiss Franc orders after the market froze.

On this basis, there is a metaphorical tug of war between companies providing FX trading, and the clients of the companies, who, across the globe, have slowed their trading activity down and both OTC FX firms and exchanges which provide FX contracts have experienced substantial contractions in volumes during February.

Saxo Bank, whilst remaining well capitalized, was exposed to approximately $107 million in negative client balances as a result of the events which took place on January 15, however the firm’s February volume figures are down to $9 billion, a 37.5% drop from the previous month.

It is beginning to become clear that risk management with regard to staving off exposure resulting from events such as the extreme volatility caused by the Swiss National Bank’s decision on January 15 has to be considered in conjunction with any potential low periods which may ensue.

With these considerations in place, Saxo Bank has taken a very positive lead in this direction.

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