Big Guns at Major Banks Getting Ready For Restless Brexit Trading

The coming week in the markets will be all about the Brexit vote.

Story Highlights

  • Dealing with the extreme uncertainty of Brexit wasn’t the main concern of Citi’s FX officials last ‎‎week, but the sudden advance of the Leave camp is a cause to panic

According to a Financial Times report, five of the Citigroup’s senior currencies executives holidayed for one to three days last weekend, ahead ‎of what the BoE’s governor described as the “biggest domestic risk facing the economy”.

Employees in the world’s biggest currencies-dealing bank felt the situation was embarrassing. The Nikkei owned newspaper quoted them as saying ‎‎“the timing and nature of the trip was insulting to employees.” One said: “The optics here are ‎bad.”‎

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So the big theme here is that a sense of responsibility could be missing among Citi’s FX executives. ‎However, others may look at the situation from a different angle – the ‘big guns’ are calming their minds ‎down in the few days leading up to black Wednesday, preparing for a Brexit restless night.

Significant Effects, All Getting Ready

The coming week in the markets will be all about the Brexit vote, as it could have significant ‎economic and financial impact in a range of scenarios. And since Britain’s 43-year-long ‎relationship with the EU is being put to the vote, central banks, brokers, banks, liquidity ‎providers, traders and all other market participants around the globe are preparing financial ‎backstops to mitigate market turmoil in case Britons vote to leave next week.‎

According to a research note from Danske Bank: “A Brexit would leave a high risk of sending the ‎euro area into recession in H2 before recovering gradually again in 2017. But the key word would be ‎the uncertainty that would hang over the markets and economies for a long time. The risk of new ‎elections in other countries on leaving the EU would be elevated and increase the concern over the ‎longer-term sustainability of the whole EU system.”‎

The sterling incurred steep losses earlier this week after recent polls showed a ‎sudden advance for the Leave camp. Up until a couple of weeks ago, the pound was edging higher along ‎with the Remain camp’s lead. The same action was seen for all major British stock indices which are all ‎now back in the red year-to-date.‎

‎Obviously post-vote market sentiment will very much depend on whether Britain decides to ‎stay or go.‎

Central Banks

In the days leading up to the June 23 poll, the Bank of England is consumed with preparing ‎contingency plans for ensuring there is no repeat ‎of the near-meltdown that occurred during the banking crisis of eight years ago.

Michael Saunders, the BoE’s MPC member, expects the pound to come under severe ‎pressure and anticipates a 15 to 20 per cent depreciation of sterling against currencies of the country’s main trading ‎partners. ‎

However, other analysts say that the BoE may not respond quickly to Brexit, and at the earliest would ‎change its monetary policy in August meeting once the politics and policy become clearer.‎

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The ECB, as well as other global central banks, announced on many occasions that it is gearing up for the UK leaving the European ‎Union by activating swap lines to financial institutions should a Brexit trigger capital ‎outflows in the short-term.

Impact on Financial Industry Jobs

It is widely expected in the finance industry that a Brexit would have a more painful impact on ‎its staffers amid contagion fears and slowing growth. Estimations suggest the Brexit to cost ‎the country some 100,000 financial services jobs, while many firms have already started making ‎contingency plans for a possible decision by Britain to leave the EU on June 23.‎

Deutsche Bank and JP Morgan have already begun to examine whether to move parts of their London business ‎and some British-based staff after a possible Brexit.‎ Morgan Stanley is preparing plans to move 1000 workers from ‎London. Most are expected to go to Frankfurt.‎

Britain’s largest bank, HSBC, warned earlier this year that it would move 1000 jobs to Paris in the ‎event of a Brexit.

French banks with significant operations in London, such as BNP Paribas, Societe Generale and Credit Agricole, have already drafted contingency plans ‎for a Brexit that would include moving staff back to Paris.

Meanwhile, RBS and Lloyds bank could dust off plans to move their ‎headquarters from Edinburgh to the British capital if the EU referendum triggers a second vote on ‎Scotland independence.‎‎

Forex Brokers

In the last few weeks, an increasing number of brokerages across various trading sectors increased margin rates to stop clients from making risky trades in the run-up to ‎June’s referendum. With the memories of the SNB’s move‎ still embedded in their minds, the step was taken in a bid to not go out of ‎business if there are wild swings in the market following the result, and to protect ‎their customers from any ‎sharp ‎shifts that could wipe out their account balances in an ‎instant‎.

In January of last year, many banks and brokers ‎booked millions of dollars of losses in a matter of minutes following the decision announced by the SNB ‎to no longer peg its currency to the ‎euro‎.‎ ‎Interactive Brokers, IG Group, London ‎Capital Group and ‎‎CMC Markets suffered steep losses while Alpari UK closed its doors and FXCM ‎had ‎to receive a ‎‎‎$300 million rescue loan from Leucadia. Saxo Bank’s net loss from the Swiss franc ‎‎black swan totalled $108 million.‎

The list of brokers demanding higher collateral from their customers for ‎‎trading includes OANDA which has lowered the maximum leverage available on ‎‎GBP pairs to 20:1 and on euro ‎pairs to 50:1, ‎starting from the market close on June ‎‎‎17, 2016‎.

Saxo bank hiked margin requirements on GBP pairs to 7 per cent. In addition, ‎Finance Magnates reported earlier this week that ‎ will put in place temporary ‎changes to its margin rate requirements after ‎the market closes this Friday. ‎Minimum ‎margin rates for all UK indices and GBP crosses including EUR/GBP will ‎increase ‎six-fold from 0.5 per cent to 3 per cent, and minimum margin rates for EUR ‎crosses, EUR indices, ‎and US indices ‎will be doubled from 0.5 per cent to 1 per cent. CMC ‎Markets and IG Group, ‎among others, also announced similar changes earlier this ‎week.‎

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