Banks and stock exchanges are warning clients of difficult, volatile trading conditions in financial markets, flagging the risk of large gaps in pricing of assets when Britain votes next week on European Union membership. Such warnings have become more common since the dramatic moves in the Swiss franc in January 2015, which led to conflicts between banks and their clients due to the absence of market prices for several minutes.
Letters from Dutch lender ING and French bank Societe Generale show the scale of concern around next Thursday's referendum and the prospect of sharp one-off moves in sterling. The outcome of the vote is seen as increasingly hard to predict. The pan-European exchange operator Euronext said it would take special measures in anticipation of higher volatility and trading volumes. These would include widening or suspending price limits for index and equity option contracts from the open on Monday June 20 to the close on Monday June 27.
A spokesman for ING confirmed the bank had sent a communication to clients warning them of the likelihood of difficult trading circumstances around the vote on June 23. A source who had seen the letter, declining to be named, said it urged clients to be patient as pricing circumstances would be difficult and warned that there could be gaps in pricing, especially if Britain votes to leave the bloc.
ING declined to comment on its precise content. Other major banks contacted by Reuters have declined to comment on the issue. The head of hedge fund sales with one of the five big banks, who account for half of the $5 trillion a day global market in currencies, said: "We have not sent anything formal to clients as yet but we have certainly been flagging the risks involved to them, making sure that people are managing the risks appropriately."
A source with knowledge of the issue said the sales and trading arm of Societe Generale, ranked outside of the top 10 currency trading banks by an annual industry survey last month, had also sent a letter to clients warning them about volatility and gaps in liquidity. Reuters has not seen a copy of either letter. A spokesman for SG said: "We do not comment publicly on communications with our clients. We remain committed to supporting our clients regardless of the outcome of the referendum."
The shock of the Swiss franc move related chiefly to banks' inability to close out existing currency trading positions at previously established "stop-loss" levels set by clients as buyers for euros and dollars disappeared. Disputes over whether banks could have found better prices than those finally given to clients provoked crisis meetings and exchanges of lawyers' letters, most notably at the retail brokers who service individual and other small-scale speculators.
Many retail brokers have already warned clients formally and increased the margin they require from customers against losses. Currency trades tend to be highly leveraged and hence can create losses far higher than the initial amount bet. Banks and brokerages also say worries over gaps in pricing on the day have led institutional clients to close out bets on the currencies seen most at risk next week, the euro and pound.
"People have been adjusting their positions to be as much as possible event risk-neutral on the day," said Marco Baggioli, Chief Operating Officer at ADS Securities in London. "Most of the buyside is neutral and if they are taking a view, they have agreed with their prime broker how much collateral they have posted."
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