RISK MANAGEMENT POLICY
Effective risk management is an integral part of Halifax’ overall business philosophy and governance framework, and is embedded in its daily processes and decision-making.
This Risk Management Policy provides a brief outline of the core processes for risk management as it applies to trading on the Halifax Pro online trading platform.
Trading in Contracts for Difference (CFDs), which are over-the-counter derivatives, is principal to principal, which means it carries a high degree of risk for both Halifax and their clients. This is due to the gearing/leverage involved, which magnifies profits and losses, and leads to much larger movements in the value of positions resulting from relatively small underlying market movements.
There are two ways in which we can issue CFD products to clients in a CFD transaction. The first is as a “straight through processor”, which means that we essentially hedge 100% of our exposure to the client under the CFD transaction by entering into an equivalent matching CFD with the relevant platform counterparty. Alternatively, we can elect not to hedge, or to hedge less than 100% of, our exposure to a client under the CFD transaction. Where a client enters into a CFD transaction with Halifax using any trading platform other than Halifax Pro, we will only issue the CFD product to you as a straight through processor and, therefore, essentially 100% of our exposure to you will be hedged with one of our hedging counterparties. If you enter into a CFD transaction with us using the Halifax Pro Trading Platform, we will decide at our discretion whether we hedge our exposure to you with one of our hedging counterparties and, if so, how much of the exposure we hedge. Further, we may decide to alter our hedging arrangements during the time the CFD position remains open. In making these decisions, we will be guided by the following market risk policy.
Halifax have implemented a two-fold solution to hedging exposures and addressing market risk arising from client transactions. With regard to transactions by smaller clients, we may seek to manage our market exposures in-house through the natural hedge created by the exposures generated by various client transactions. Accordingly, Halifax have exposure to market risk in respect of any residual unhedged exposures, and have implemented formal processes to monitor and limit such exposures in line with Halifax’ risk appetite.
With regard to transactions by professional/institutional clients, and where there is a significant differential in the natural hedge created by our in-house risk management regarding smaller client transaction exposures, we fully hedge the exposures generated, with reputable licensed third party globally reputable financial services providers to as far as possible ensure that we do not have any large or unmanageable unhedged market exposures.
In cases where we decide not to enter into a transaction to hedge some or all of the exposure to client positions, we have a policy which enables Halifax to do this within set exposure limits if, as per above, there is a natural hedge created by our client positions, or if the exposure falls within our pre-set exposure limits.
These reflect our conservative risk appetite, the extent of our financial resources and the nature and extent of any other financial risks we are exposed to, together with the expected liquidity and volatility of the underlying products and markets (and equivalent financial products). We undertake real-time monitoring of our exposures against these limits and have a process in place for if they are exceeded.
We only allow clients to trade with cleared funds (for both initial and variation margin requirements). Accordingly, the online trading system will automatically close out any position which is not supported by the required margin. No credit is permitted to clients under any circumstances.
Halifax undertakes regular and rigorous assessments of our funding and asset liquidity risk taking into account: (i) the duration, stability and breadth of our funding, (ii) the degree of our reliance on collateral, (iii) the strength and permanence of our capital, and (iv) the potential for market losses under stress conditions including the additional impact of partial asset liquidation.
We have appointed an independent external risk manager to conduct stress testing and scenario testing regarding open positions in line with our underlying exposure, and to establish pre-set aggregations to be hedged in relation to open positions. This ensures the process is conducted with full independence, specialised expertise, robust systems and free of potential conflicts of interest.
The process includes the monthly formulation of a designated maximum exposure point which can be tolerated by Halifax’ financial position, if the market/exposures move against Halifax. Our compliance department undertakes a daily review of Halifax’ financial position and strength, against this designated exposure point.
Where open client positions are hedged, we use one or more globally reputable counterparties. Each of our hedging counterparties are reviewed to ensure they are of sufficient financial standing, are licensed by a comparable regulator, and are of sound reputation. The financial status of each of our approved counterparties is monitored on a regular and ongoing basis in order to proactively detect situations where counterparty credit quality might deteriorate. Credit limits refer to the amount of credit risk that we may take in relation to an approved counterparty.
We regularly address credit risk across our organisation and in so doing consider aggregate receivables, potential future exposure, and aggregate collateral and sensitivity of exposure to key economic factors/drivers. Finally, we undertake ongoing monitoring and implement suspension action in relation to unauthorised trading.