As the clock starts ticking faster for Theresa May and the incoming Brexit vote in the UK Parliament, brokers are starting to manage FTSE 100 risks ahead of the event. GBP pairs and the UK stock market are particularly vulnerable to the upcoming vote.
Swiss brokerage Dukascopy Bank announced on its website that it would be increasing leverage requirements for GBP pairs. The practice has become customary in the aftermath of the SNB black swan which caught markets unprepared in January 2015.
Dukascopy is reducing leverage to 30:1 for the UK stock index, quoted by the company is GBR.IDX/GBP. The company is also adding restrictions to both crude oil pairs it is offering BRENT.CMD/USD and LIGHT.CMD/USD.
The changes are going to be applied starting from 18:00 GMT today (Friday, December 7, 2018).
Managing Volatility Risks
The company has not added increased leverage requirements for GBP pairs. IF the Brexit referendum is any guide, history shows that moves can be very abrupt and spreads can rise as much as 50 pips.
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The present high probability for a massive spike in volatility around the UK Parliament vote is leaving few options for brokers. Firms need to manage risks adequately, and implied volatility in the British pound has been rapidly surging in recent months.
The vote is scheduled for Tuesday, the 11th of December 2018. Dukascopy Bank expects the immediate turmoil to be over by Wednesday when it plans to restore margin requirements.
Dukascopy reserves the right to keep the leverage restrictions in place until the brokerage decides that market volatility has returned to acceptable levels.
Dukascopy is making no mention of GBP pairs, but if history is any guide, other brokers could adopt similar measures for the FX market. The massive liquidity squeeze which we saw in June 2016, could repeat itself.
Brokers are expected to revert margin requirements back to normal within hours of the initial turmoil. But then, nobody knows how bad can it all be, so traders should plan accordingly.