Banks and professional traders are lining up to take advantage of volatility created by Britain’s vote on EU membership. Amateur investors are also looking to cash in during the June 23 vote, but this has made some online platforms wary of the losses they could rack up.
Swissquote, one of Switzerland’s largest online brokers with more than 230,000 client accounts, understands better than most the risks of “armchair investors” getting in over their heads. Last year it had to write off CHF25 million ($26 million) in bad debts when account holders were caught out by the central bank’s abandonment of the franc-euro pegexternal link.
With the Brexit vote looming, Swissquote is now determined to limit the size of clients’ bets by raising margin rates on certain foreign exchange trades from 1% to 5%. This means that traders using its platform must now put up five times more capital to cover the risk of trades going sour.
Using CHF50,000 of their own money, Swissquote users can now speculate on currency exchange rates to the tune of CHF1 million – instead of the normal CHF5 million ceiling.
Other online brokers have followed suit, including Cornér Bank’s platform Cornér Trader, the Geneva-based IG Bank and the Swiss branches of Saxo Bank.
The June 23 referendum in Britain represents the perfect conditions for traders: a planned event with a highly uncertain outcome (opinion polls are still divided on the result) that could bring big swings in market prices either way depending on the way votes are cast.
Volatile exchange rates
The British pound has already lost 7% of its value against the Swiss franc since January. Some analysts believe the sterling could plunge 20% against the US dollar if the Brexit “Leave” campaign wins.
On top of that, Britain leaving the European Union would almost certainly depress the trading value of the euro. The franc recently hit six-month highs against the euro.
Alternately, a “Remain” vote would likely rally the British pound and reverse much of the downward pressure it has faced in the past few weeks of uncertainty.
In addition to foreign exchange trades, the bond and derivatives markets are also bound to see winners and losers come June 23. Professional traders, particularly in London, which is home to most of Europe’s investment bankers, are talking about Brexit as one of the most highly anticipated events in recent times.
Several media have pointed out that teams of traders in all major investment banks have been ordered to work through the night on Thursday. It is expected that results of the referendum will start drifting in at around 10pm Swiss time.
Swiss private banks have also been quietly enjoying some of the benefits of the pre-referendum uncertainty. Those investors who lack the risk appetite of investment bankers or day traders have been pulling their assets into safe havens, such as the Swiss franc.
Should Brexit become reality, Swiss private bankers expect the flow to expand into a flood of cash escaping the volatility.
“If you see major corrections, clients try to protect their assets first,” UBS head of wealth management Jürg Zeltner recently told Reuters. “A lot of clients sit on 30-plus per cent cash. So what they are going to do is just move that into what they will consider a safe haven.”