By William James, Freya Berry and Patrick Graham
The world’s biggest banks including Citi and Goldman Sachs will draft in senior traders to work through the night following Britain’s referendum on EU membership, set to be among the most volatile 24 hours for markets in a quarter of a century.
A vote to leave the European Union on June 23 would spook investors by undermining post-World War Two attempts at European integration and placing a question mark over the future of the United Kingdom and its $2.9 trillion economy.
Citi, Deutsche Bank, JPMorgan, Goldman Sachs, HSBC, Barclays, Royal Bank of Scotland and Lloyds are among those banks planning to have senior staff and traders working or on call in London as results start to dribble in after polls close at 2100 GMT, according to the sources.
Jamie Dimon, chief executive officer of JPMorgan Chase & Co, told employees on a visit to Britain this month that if the vote was to leave the EU, the bank would have to have “teams of people thrown on what that means”.
“We won’t know what it means: there is a wide range of outcomes,” Dimon, a supporter of Britain’s membership who has warned of job cuts at JPMorgan in Britain if there is an Out vote, said in the broadcast speech.
A vote to leave could unleash turmoil on foreign exchange, equity and bond markets, spoiling bets across asset classes and potentially testing the infrastructure of Western markets such as computer systems, stock exchanges and clearing houses.
Federal Reserve Chair Janet Yellen has cautioned that a Brexit vote could shake financial markets and potentially push back the timing of the next rise in US interest rates.
Bank of England Governor Mark Carney has said sterling could depreciate, “perhaps sharply” and some major banks have forecast an unprecedented fall to parity with the euro and as low as $1.20 in the days following any vote to leave the bloc.
The Bank of England will be staffed overnight, with senior policymakers on call if markets go into meltdown. The finance ministry would not comment on its staffing plans.
The official Vote Leave campaign argues there is no evidence that leaving the EU would weaken sterling long term, while Nigel Farage, leader of the UK Independence Party has said that even if the currency did fall, it would simply boost British exports.
Sterling – the world’s fourth most traded currency – has moved sharply in recent weeks, often on the back of opinion polls.
Depending on the results from across the United Kingdom, the night of June 23 and early morning of June 24 could rank as one of the most volatile nights in the history of the London market.
“We’ve all seen US elections, UK general elections, we’ve had the Scottish referendum, the collapse of Lehman and QE (Quantitative Easing) but this is by far and away the biggest risk event that has presented itself to the UK,” said Chris Huddleston, head of money markets at specialist bank Investec.
London accounts for 41 per cent of global turnover in the $5.3 trillion-a-day foreign exchange market, more than double the turnover in the United States and far more than the 3 per cent of its closest EU competitors, France and Switzerland.
“All the traders are going to be in … They don’t like missing big moments, if there’s going to be one, they want to be at their desk,” said a senior source at a major bank based in the Canary Wharf financial district of London.
Some banks are planning the night down to the smallest detail to keep their traders on top form – laying on all night catering and booking nearby hotels to offer temporary respite.
“It is the biggest planned risk event that anyone can remember, so everyone is going to be involved. The question is just when you try and get some sleep,” said one senior foreign exchange trader.
No exit polls are planned by British broadcasters so the first numbers from the counts will be turnout results from 382 different areas followed by totals for ‘Remain’ and ‘Leave’ in each area.
Polls have given contradictory pictures of British public opinion, keeping markets guessing on the final outcome.
That has left sterling, currently priced at $1.41, far away from either of its likely resting places after the final result is known – seen by banks as around $1.50 in the event of a remain vote, or $1.30 or lower if Britain votes to leave.
That almost-certain rapid repricing could set the scene for one of the rockiest sessions since traders wrestled down the value of sterling on Black Wednesday, September 16, 1992, when Britain crashed out of the European Exchange Rate Mechanism.
“If it’s Brexit, then we’re looking at something that’s at least on the scale of Black Wednesday,” said Nick Parsons, global co-head of FX strategy at National Australia Bank and a veteran of the 1992 sterling crisis.
Prices for derivatives used to mitigate the risk of sharp swings in sterling point to a period of intense volatility.
Officials and bank managers planning for the event draw comparisons with the 40 per cent surge in the Swiss franc in January 2015, which bankrupted dozens of small investment funds and cost banks including Citi hundreds of millions of dollars.
Traders and analysts told Reuters they would expect a Brexit vote to cause sterling to ‘gap’, or plummet lower – as orders to sell the currency met an absence of willing buyers, leaving a blank spot on the price charts snaking across traders’ screens.
Gaps can inflict huge losses on banks and traders, forcing them to bail out of trades at prices far below the automatic sell orders, or ‘stops’ they normally use to limit losses.
Currency market participants have urged the Bank of England to call on US Federal Reserve if the turbulence gets really bad. The BoE could buy sterling with dollars borrowed directly from the US central bank under arrangements first used in response to the global financial crisis in 2008.
Carney has said the Bank would not stand in the way of any exchange rate adjustment but would take the necessary steps to ensure markets remained orderly. It has not commented on whether or how the bank might intervene.
“MONEY TO BE MADE”
A senior source at one London bank said his firm had been building big reserves of sterling to lend out to any clients who get caught short by swirling asset valuations that require them to post extra security deposits with their trading partners.
Foreign exchange brokers such as PhillipCapital UK and Saxo Bank have raised the security deposit they demand from clients in order to trade, a step designed to offset the increased risk that customers get caught out by sharp moves.
One asset manager who declined to be named said his firm had run a test to see if it could cope with a 30 per cent fall in sterling. The fund had increased its cash holdings and would have traders working overnight, ready to sell other assets in case it needed to raise more cash in a hurry.
Volatile markets not only put traders under pressure: they test the limits of the technology that underpin the market.
A source at the London Stock Exchange said volatility could spike on June 24 and that it was putting in emergency capacity for transaction reporting to cope with any spike in trading volumes that might otherwise overwhelm its systems.
Despite facing a battle against surges in trading volumes, volatile prices and, at times, the absence of enough buyers or sellers to meet demand, some traders are rubbing their hands at the prospect of a night and day of high drama.
“You look forward to days like this,” said one bond trader at a major London bank. “There’s money to be made and lost … You’ve just got to hope you’re on the right side of it, not the one being carried out the door.”