Broker Risk Management And Dynamic Margin

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Forex and CFD trading are leveraged products and, by their very nature, involve a degree of risk for both retail traders and broker operators. While various risk management solutions are available to brokers, many of these tend to be reactive in design rather than proactive (Dynamic Margin).

Trading today has become a much more complicated activity, and the days of simply designating clients as A-Book or B-Book are long gone. Instead, broker risk management systems must be much more flexible and allow clients to trade. After all, the single most effective way to minimize trading risk is not to trade, but it wouldn’t make for a very effective marketing campaign!

Traders are spoiled for choice regarding where to trade, and overly restrictive risk management policies could well see clients moving to different brokers. Risk warnings abound, but trading volumes are on the up. Retail traders accept the risk as part of the process, which essentially it is. Any speculative activity comes with a degree of risk, forex and CFD trading included.

One of the fundamental truths of the retail forex market is that traders love leverage, and brokers need volume. One other fundamental truth about the industry is that brokers hate uncertainty. While volatility is touted as a market positive, uncertainty is a broker’s worst enemy. A well-structured dealing room can handle the effects of economic releases or scheduled news releases. After all, these are known events with statistically supported outcomes.

Black Swan Event and Dynamic Margin

The unforeseen event is the nightmare scenario. Black Swan events like the Swiss National Bank’s decision to abandon the 1.20 CHF/EUR peg on July 15th, 2015.

That move stunned the markets and led to the collapse of several significant brokers of the time.

Static risk management procedures needed to be revised.

Static Risk Management Tools

Reducing Leverage on Specific Symbols

Simple way to limit risk in times of extreme volatility
Reduces risk from large clients

Restricts trading from small clients with little downside risk

Increase Margin Requirements on Larger Accounts

Limits exposure to large clients on high leverage

Restricts client trading options
Can prevent clients from trading altogether

Net Open Position Limits

Limits risk exposure

Just a few traders can take all the allocation
Limits traders from trading certain symbols

Disabling Symbols (Or Close Only)

Effective in extreme events

Traders view it as a manipulative, preventative tactic

Enter Dynamic Margin!

Dynamic Margin is a proactive risk management tool that changes margin requirements on trading accounts as trade exposure increases. Broker predefine their margin tiers based on their acceptable risk levels, and these requirements come into effect automatically as trade exposure limits are reached.

Risk Management Examples

  • Account Currency : USD
  • Account Balance : 25,000
  • Equity : 25,000
  • Leverage : 1:500

Example #1 – Without Dynamic Margin

Excluding spread and no commission, this trading account could get $12.5 million in exposure to the market.

Example #2 – With Dynamic Margin

Let’s assign a Dynamic Margin structure to this trading account as follows:

0 – 1 million1:500 (0.2%)
1 – 2 million1:200 (0.5%)
2 – 3 million1:100 (1%)
3 – 5 million1:50 (2%)
5 million +1:25 (4%)

Let’s now look at some potential positions:

Position #1: BUY 1,000,000 USD/JPY – This first position falls within the first tier of the Dynamic Margin table, meaning that a 0.2% margin is required. The margin taken for this position is $2,000.

Position #2: BUY 1,000,000 USD/JPY – This second position falls within the second tier of the Dynamic Margin table, meaning that 0.5% margin is required. The margin taken for this position is $5,000.

Position #3: BUY 1,000,000 USD/JPY – This third position falls within the third tier of the Dynamic Margin table, meaning that a 1% margin is required. The margin taken for this position is $10,000.

Position #4: BUY 400,000 USD/JPY – This fourth position falls within the fourth tier of the Dynamic Margin table, meaning that 2% margin is required. The margin taken for this position is $8,000.

These examples highlight the difference a Dynamic Margin solution can make. The same trading account trades 12.5 million USD/JPY in the first and only 3.4 million in the second scenario. The Dynamic Margin solution allows clients to trade across all symbols with relatively high leverage without the restrictions of a static risk solution.

In 2015 we became the first FINTECH company to release a Dynamic Margin plugin for the MetaTrader family of trading platforms. Part of our Multiple Award-Winning YOONIT flagship suite of intelligent modules, our Dynamic Margin plugin drives the risk management of over one hundred of the leading brokers in the world. Powerful and flexible, our Dynamic Margin plugin comes packed with cutting-edge features, including:

  • Multi-Platform : Fully compatible with MT4 and MT5
  • Multi-Asset : If your clients trade it, we support it, including FX, Commodities, Indices, Futures, Stock CFDs
  • Highly Configurable : Create unlimited profiles, each profile supporting unlimited tiers.
  • Simple to Manage : Manage multiple MT4 and MT5 trading servers from a single interface.
  • Flexible : Dynamic Margin profiles can be assigned to asset classes, symbols, user groups, and even specific trading accounts.
  • Real-Time Modifications : During major events and news releases, brokers can modify their Dynamic Margin profiles in real time.

Our risk management plugin powers over one hundred of the world’s leading forex and CFD brokers. Contact us today for a no-obligation demo of what PLUGIT can do for your brokerage.

Learn more about the PLUGIT solution

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