LeapRate Exclusive… Further to our exclusive coverage of Saxo Bank’s plans to curtail leverage provided to clients in FX trading leading up to the June 23 Brexit vote in the UK, LeapRate has learned some more specifics of the leverage restrictions and new margin requirements at Saxo.
The leverage restrictions and increased margin requirements are being put in place to protect Saxo Bank traders from a possible spike in certain currency pairs around the time of the Brexit referendum, as well as a possible widening of currency market spreads for at least a temporary period around the vote.
Saxo Bank plans to send out the new requirements in a note to clients early next week.
While the plan outlined here is unique to Saxo Bank, we believe that a number of other leading forex brokers are likely to implement similar measures in the coming weeks. However some brokers might do so only in the 24-48 hours leading up to the Brexit vote, if the expected vote results remain a close call.
Saxo Bank’s main plan is apparently to hike margin requirements on GBP currency pairs to 7%, meaning max leverage of about 14:1 on GBPUSD, EURGBP and other GBP pairs. Leverage allowed in normal market conditions at Saxo Bank in GBP majors is 50:1, or margin requirement of 2%.
Saxo also plans to increase margin on UK stocks and indices to 8% (12.5:1 max leverage). Again by comparison, UK100 margin is usually 2% (50:1 leverage) and UK250MID 5% (20:1).
Saxo Bank Head of Markets Claus Nielsen provided some more explanation to LeapRate on their plans to protect clients around the June 23 Brexit vote:
The UK referendum on EU membership taking place on 23 June is a significant market event whose outcome may lead to disorderly markets impacting pricing and liquidity of certain assets. As a result, Saxo Bank, is doing its utmost to educate its clients on the range of options available to them to ensure smooth execution.
Saxo has launched a number of initiatives including a UK EU Referendum webpage to support its clients in the run-up to and following the event. Additionally, Saxo is promoting the use of long options which are unleveraged, can be used to express both long and short volatility and directional views. They can also be used to achieve better portfolio protection compared to traditional stop-loss orders.
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.
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.
Going into an event of this magnitude with less than a 5-7% margin requirement on any UK margin instrument does not seem responsible to us and gives the retail client a wrong impression of the underlying volatility and risk.
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.