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Screenshot of a breaking news alert e-mail from Q2 2017
High margins and low volatility…..
The entire FX industry worldwide has begun to settle down following the black swan event which took place on January 15 this year, sending the currency markets into rapidly accelerating volatility as the Swiss franc appreciated in value against the Euro when the Swiss National Bank removed the 1.20 peg.
February has now concluded, with low volumes having been recorded by many companies following the raising of margins which took place following the event in order to mitigate exposure to negative client balances should further events of this nature occur.
Saxo Bank has taken a proactive stance from the outset, being one of the first companies to declare its position on January 15 as well capitalized despite a negative client balance exposure of $107 million.
Today, LeapRate spoke to Claus Nielsen, Head of Markets at Saxo Bank in order to fully ascertain the firm’s perspective on margins, and how companies will view the dichotomy between increasing margin requirements and further events which could lead to market volatility.
There has been some degree of speculation following February’s low volumes across the entire industry after a period of high activity at the end of January following the volatility caused by the SNB decision to remove the 1.20 peg on EURCHF. How does Saxo Bank view the future risk model in terms of margins to pan out across the industry?
The volatility spike we saw in January has somewhat subdued over the past few weeks but we are in no doubt that we are in the middle of paradigm shift which will see more, rather than less, volatility in financial markets in general. In this new environment, it is important that risk models are dynamic enough to anticipate and react to changes in the risk profile of the underlying instrument and asset class.
Do you consider a strict margin requirement to be a continual focus of Saxo Bank, and that further events may lie ahead that could create extremely high volatility, thus erring on the cautious side is the right option?
We are already in a period of high economic and geopolitical instability which we believe will translate into more volatility ahead. At the same time, we continue to see asset prices being determined not purely by economic fundamentals, but increasingly by political decisions.
This means that investors, even seasoned ones, will need to be more prudent than ever. As a broker, we will not compete on risk, but will do our best to lead the industry with a responsible approach to leverage, and from time to time this may require more stringent margin requirements to help our clients prepare for what’s ahead.
What many in the industry have not understood yet, is that we all need to be prepared for bigger swings of very short duration. As I have stated many times, we don’t have a crystal ball, but increasing the margin sends a strong signal. We expect firm volatilities over the coming months and to reflect this we have during January and February increased various margin requirements on a number of products in order to protect clients.
Is it more prudent in terms of safeguarding client balances and commercial revenues to raise margin requirements on certain instruments, or is this a time at which operating a b-book in times of high volatility and an A book in other periods could be invoked?
The best way to safeguard commercial revenues is to ensure that your clients are informed traders, aware of the risks and the opportunities at any given time. We have said many times that we will not compete on risk. We believe that the aligned interests model is the best one, both from a risk management perspective as well as from a client retention perspective.
What is your view on the correlation between industry-wide low volumes in February – Do you think it is down to investor sentiment, or trading terms of brokerages with risk management measures in place following January 15?
“Risk off” after a shock like this in one of the major currencies and lower volatility coupled with investor sentiment has contributed to lower volumes. We believe that robust risk management safeguards, or may increase, confidence in trading rather than deter investors from trading.
This is why we have seen a fresh inflow of new clients, with clients’ collateral deposits at a record-high, ready to trade when volatility returns again. At the same time, this new approach to risk management means clients are increasingly looking to trade across multiple asset classes to diversify risk – this way they can generate returns in say equities, when FX volatility is low.