By Michelle Price
HONG KONG (Reuters) - Singapore Exchange Ltd said it has raised a number of cash firms must pledge to cover trading positions due to an expected rise in market volatility linked to Britain's vote on whether to exit the European Union.
Asia's markets will be the first to open in the wake of a landmark referendum on Thursday that will see UK citizens decide whether or not the country should remain a member of the European Union.
Traders expect extreme volatility, especially in currency markets and related currency derivatives contracts, particularly if the "Leave" camp wins.
"SGX has been assessing the potential impact of the UK's referendum on the country's EU membership," Agnes Koh, Chief Risk Officer, SGX told Reuters.
"Given the potential for increased market volatility, we have taken the precautionary step to introduce higher margins for contracts, including those with material open interest."
SGX is the first Asian exchange to publicly confirm increasing trading margins, although several others including the Hong Kong Exchanges and Clearing Ltd (HK:0388) and the Australian branch of London Stock Exchange Group-owned LCH have privately told dealers they may also hike margins or require additional intra-day margin calls, traders told Reuters.
SGX, which raised margins on Friday June 17, said it would continue to monitor market developments and may make further adjustments if needed.
Market volatility has already spiked in the run up to the referendum, with the CBOE Volatility index (VIX) or VIX surging this month and up 14 percent on Wednesday alone as polls showed the outcome was too close to call.
A spokeswoman for LCH, which clears over-the-counter derivatives in Australia, declined to comment on discussions with clients, but said the company's rules allow it to make additional margin calls. HKEX declined to comment.
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Clearing houses are a critical part of the global trading infrastructure, sitting between two counterparties to a trade to guarantee its completion in the event either counterparty goes bust. To cover the risk of default clearers require clients to pledge a set amount of margin, generally cash or securities, at the end of the day, but these margin calls can be raised, or made in the middle of the day, amid large price swings.
Dealers and traders in Asia Pacific have also taken a series of precautionary measures, including raising the margins they charge clients, stress-testing trading systems, and increasing staff to ensure client positions are fully covered, traders told Reuters.
Many staff will be on call and key decision-makers will have to be present on the trading floors.
"We have increased margin requirements for a lot of instruments, all European indices, all FX and precious metals as well," Sydney-based CMC Markets chief market strategist Michael McCarthy told Reuters.
"It's an important move from us both in terms of making sure there is enough capital in the trading accounts to protect the traders but also as a signal to them that we're expecting potentially unusual markets and they should be ready for that."
Many brokers were hit by a sudden lifting of a cap on the Swiss franc against the euro in January 2015 by the Swiss National Bank that saw trading seize up, prices disappear and the currency's value balloon by 40 percent in minutes. That led to a trail of losses and bankruptcies, especially in the retail trading segment.
Major banks around the world are also preparing.
One senior HSBC executive said the bank had ramped up staff levels in its global markets business and had extra people on call. An HSBC spokesman said the bank has prepared for any market impact caused by the referendum.
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