We’ve been through a plethora of elections across the globe during the past year. Starting from the UK Brexit referendum, through to the US presidential election, brokers have identified certain risks to their books and have taken appropriate measures.
A year into the post-Brexit world, we are starting to see some pullback from major brokers when it comes to managing political risks. While 6 months ago the UK election would surely have signified another batch of margin increases, this time around brokers are taking a more relaxed approach towards the key risk event for the British pound.
In contrast to a number of previous occasions, such as the Italian referendum, the French presidential elections and the US election, most brokers are choosing to stay put for now. A few companies have announced that they will be increasing margin requirements on GBP pairs and some are also touching on stock indices, but the predominant position across the industry is that this time it’s different.
Brokers are starting to compete on margin requirements and those who have safe enough risk management protocols in place will likely ignore the event and rely on their tech to protect them.
What is Different this Time?
In contrast to previous referendums and elections, the UK parliamentary election is not going to have a binary outcome. While there can be only one president and only one answer to a ‘YES’ or ‘NO’ question, the distribution of parliamentary seats in the country that is preparing to leave the European Union could come in many complex variations.
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There are several scenarios that are possible in the current environment, and there is really not a lot of clarity as to what the impact will be on the financial markets. Following some tumultuous weeks in UK politics, Theresa May’s lead is being questioned by the markets in recent sessions. Any failure for her to get a material majority would result in a decline in the exchange rate of the British pound.
Sterling is likely to benefit if the Tories win big, since that would mean that Theresa May can go ahead with a softer approach towards Brexit. The UK’s Prime Minister will no longer need the votes of the most conservative wing of the UK Conservative party.
An outright loss of majority would also be detrimental to Brexit negotiations, since a hung parliament is unlikely to result in a stable government that is going to deliver on Brexit. This may be only short term, because despite the pledge of Labor that the party is committed to the exit from the EU, politicians rarely adhere to their pre-electoral promises.
Lack of Clarity
Undoubtedly, the worst possible outcome for the pound is the lack of clarity. A hung parliament, or one where no single party can rely on a majority, could cause chaos as to who can negotiate Brexit and when.
One thing is certain – the outcome of the UK election is likely to cause substantial volatility. The question for brokers and their decisions in regard to this issue is whether to look after their risk exposure to the market event or look after clients that wish to trade aggressively around the vote.