Forex and CFDs brokers are preparing for what could be the next trigger of volatility in the foreign exchange market. The companies are reassessing risks and looking at positioning that exposes them most to the risks stemming from the outcome of the general election in Italy.
Past elections and referendum votes across the EU have prompted brokers to raise margin requirements for certain FX pairs and assets. The rationale for the firms and their clients is more effective risk management in case an unexpected outcome derails financial markets.
Italian stocks are the first and most-briskly impacted market, with the euro following closely as a currency that is vulnerable to a win by the euro-skeptic Five Star Movement.
According to preliminary polls, the outcome is anything but certain. Italian preliminary polls have historically been inaccurate which exacerbates the risks for financial markets.
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Brokers Reducing Margin Requirements
XM is the first brokerage that cut leverage on the euro and the Italian index to a maximum of 1:100 and 1:50 respectively. The move is consistent with adequate risk practices by brokers around key economic and political events.
A slew of companies are likely to follow suit in the coming days as the election in Italy takes place on Saturday. In what is a complex electoral system, the results of the vote are not likely to be announced before noon on Monday. The risks for the industry are associated with a massive decline in the value of the euro and Italian stocks.
Chief risk measures will be targeted at the S&P MIB Index in Italy, however, broader European indices are also at risk. In contrast to some other elections, particularly the French polls last year, the results will be published during market hours.
Part of a Post-SNB World
Forex brokers have started cutting exposure to key risk assets before prospective big news in the aftermath of the Swiss National Bank’s removal of the floor under the EUR/CHF exchange rate in January 2015. The event caused losses in the industry of well over a billion dollars. To this day, a major shift in the regulatory landscape has prompted companies to reassess their risk management practices.
At the same time, the regulators have started taking action based in part on the negative balance issues arising from the SNB shock to the markets. Several big companies from the industry have refused to waive negative balances, therefore causing a major outcry on part of consumers and yielding the ESMA’s proposal to warrant against negative balances for retail clients.