Brokers are not the only entities cautiously watching the US election on Tuesday – the National Futures Association (NFA), the American self-regulatory group governing on-exchange traded futures, retail off-exchange foreign currency and OTC derivatives, has increased the margin requirements for foreign exchange (FX) transactions in anticipation of a tightened race, per a NFA statement.
The US election has become a near coin toss according to recent polling, which could make it one of the most seismic events since the Swiss National Bank (SNB) crisis in 2015. As a result, the NFA will be requiring forex dealing members (FDMs) to collect and maintain a margin requirement of 2% of the notional value of transactions in the ten listed major foreign currencies and 5% of the notional value of other transactions.
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In particular, under Section 12 of its regulatory requirements, the NFA’s executive committee is allowed to increase such requirements under extraordinary market conditions – current markets are pricing in a Hillary Clinton victory, the opposite of which could effectively convulse currency markets worldwide amidst widespread volatility.
This same cautiousness was also reflected in the NFA’s stance on the British pound – forex brokers under Section 12 have been obligated to increase the margin requirements of currency pairs involving the British pound to a minimum of 1:20. Past examples also include the raising of margin requirements of the Mexican peso in early 2015.
Such strategies are designed to mitigate a potential explosion of volatility, which can potentially lead to market turmoil given a liquidity dearth and rapid price swings. The increase in security deposits will be effective as of 18:00 EST (23:00 BST) today and will be in effect until further notice.