With the looming deadline of a hard Brexit approaching fast, some brokers are starting to consider measures to limit their exposure to potentially extreme volatility in the British pound. GBP pairs look vulnerable as the three-month implied volatility on the currency’s moves against the US dollar sits at the highest levels seen this year.
While the measure is still way below the levels seen in the run-up to the Brexit referendum, brokers are looking for ways to limit their risks. While retail traders in Europe are already using relatively low leverage at 30:1, the changes are likely to affect professional traders more materially.
Most brokers have not announced any proactive measures at this point in time, but several firms shared with Finance Magnates that they are prepared to act in case of market turmoil. In the aftermath of the Brexit vote, the UK’s currency was hit by a flash crash in October 2017. At the time the currency slipped nine percent against the US dollar in mere minutes.
As traders are increasingly aware of prospective volatility coming due if a chaotic no-deal Brexit comes to pass, some brokers are taking the first measures. Depending on position sizes, Alfa Capital is limiting the maximum leverage used by professional clients to between 50:1 and 20:1.
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Clients with exposure up to 50,000 are least affected, while those who have positions in excess of $2 million are going to be impacted by the changes the most.
Elections and Flash Crashes
Aside from the UK Brexit referendum, the surprise UK election results in June 2017 have resulted in a sudden 200 pips drop in the GBP at the time. Risk-managers at brokerage firms will be looking closely towards elevated risks of a new parliamentary election and its results.
That said, for the time being, Brexit is likely to come before a new election is called by Boris Johnson. The UK Parliament will be suspended for over five weeks after Queen Elizabeth II approved the request of the Tory leader.
Currently, the three-month implied volatility of the GBP against the USD sits around 14 percent. The last time the level was this high was when Theresa May was battling for the UK parliament to ratify the agreement with the EU which her cabinet hammered out.
The British currency is hovering just below 1.22 at the time of writing. With or without a no-deal exit, the volatility of the pair is only likely to increase over the coming weeks. While most of the Brexit trade has been priced in, some analysts expect a further decline once the shock materializes.