Banks under increased scrutiny over post-referendum trading

UK financial regulators have put London’s banks and brokers under increased scrutiny ahead of Friday’s trading day in anticipation of frenzied market reaction to Britain’s EU referendum results.

The Financial Conduct Authority has put financial institutions on notice about “potential conduct risks” — including giving some customers preferential treatment as orders stack up in what is expected to be highly volatile markets.

In response to the alert, banks have imposed extra restrictions and risk limits for traders in the asset classes they operate in, and warned staff that their conversations will be closely monitored.

“The risks around treating customers fairly and market abuse are the same that firms face every day, but any large swings in the market would just magnify those risks,” said Guy Wilkes, a former FCA enforcement official now at the law firm Mayer Brown.

“Traders are going to hit their limits much more readily than they would on any other day; expect more controls in place and more market monitoring.”

London’s financial markets have seen some of their most volatile swings since the 2008 financial crisis in the week leading up to Thursday’s vote, with sterling trading near its lows for 2016 before hitting new highs for the year against the dollar on voting day.

One measure of sterling volatility surpassed records set during the financial crisis, before easing back on Thursday.

Bankers said they had been in constant contact with regulators about their preparations for Friday’s trading day, with some providing details of expanded operational capacity to deal with daily volumes of up to 10 times regular trading.

Some banks put the additional trading restrictions in place even before the results were known because of the extreme swings ahead of the vote.

Barclays stopped accepting new stop-loss foreign exchange orders — a trigger to buy or sell at a specific price — on its Barx electronic platform and is instead transferring them to voice brokers because of increased volatility in currency markets.

“Our global sales, trading and research teams will be helping clients navigate markets throughout the night and post the EU referendum decision by delivering a normal service for our clients at all times as far as market conditions allow,” the bank said.

The FCA has been quizzing firms across the City of London in the past fortnight about their contingency plans for market volatility and how their capital and liquidity buffers would be affected.

“The FCA are aware that firms will be positioning to hedge or make profits from extreme volatility but are looking for them to ensure that in doing so their behaviour in the markets is orderly,” said Tim Aron, a former regulator now at Arnold & Porter, the law firm.

But the FCA is also concerned that any large movements in the markets could prompt misconduct, according to people briefed on the watchdog’s thinking.

One additional scenario that concerns the FCA is that “tired and wired” traders forced to work long hours over the course of the referendum could start to speculate amid misinformation and rumour.

“If some hedge funds look like they are on the wrong side of the vote and someone notices they have the same prime broker, there could be some hysterical traders worrying about the stability of that prime broker,” said another adviser. Prime brokers are investment banks and securities firms that provide services to hedge funds.

Banks have required senior managers to be present through Thursday night and into Friday’s early hours on trading desks to curb any frenzied bets by their teams, the adviser added.

The FCA wants to avoid a repetition of early 2015, when the Swiss National Bank unexpectedly scrapped a cap on its currency against the euro, leading to heavy losses among currency brokers and trading firms that allow clients to magnify their positions with leverage.

The large, surprise swing in the Swiss franc left clients who lost money unable to pay up to meet margin calls and the brokers suffered losses.

Additional reporting by Laura Noonan, Martin Arnold and Richard Blackden