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By Tyler Durden

Ahead of Thursday’s historic Brexit referendum vote, market jitters are bringing back memories of September 16, 1992, when the UK was forced out of the EU’s exchange-rate mechanism, or ERM, as speculators’ borrowing exhausted the central bank’s resources to keep the pound above its floor.

This is better known as the day George Soros “broke the Bank of England”, making over $1.5 bilion profit in the process. On that day, the U.K. decided to let the pound float freely rather than to suffer the high interest rates needed keep the currency within its limits. As a result the central bank raised its key rate to 12% from 10%, then announced a second increase to 15%. By the evening of that same day, which became known as “Black Wednesday,” the government withdrew from the ERM, a pre-euro system of European exchange-rate integration.

24 years later, traders recall one of the longest days in the history of the currency.

Here, courtesy of Bloomberg and for the benefit of traders who were still in school (or may not have been born), is a recap of how veteran FX traders saw, and reacted to, events on “Black Wednesday” two and a half decades later in what has been dubbed “one of the longest days in the history of sterling.” Will Thursday be an even more historic day for FX trading? We will know the answer in just four days…

John Glover, now a Toronto-based managing director at risk- advisory firm Validus Risk Management:

• “At the time I was running the USD/Deutsche Mark options book for a Canadian bank, but we did run a very large GBP/USD book
• ‘‘GBP had been the focus in the days leading up to the ERM exit, losing somewhere around 5% of its value in two or three days
• ‘‘For a day or so, no one could understand what was happening, unless of course you were at a bank where Soros was a client of the gilts desk
• ‘‘That day, the only GBP flows going through were institutionals that had to get out of longs, and it was pretty much only the BOE that was buying”
• “Our central bank desk struggled to get through to the bank as the phone lines were jammed. Corporates were sitting on the sidelines
• ‘‘Our GBP options book made more in two weeks than they ever had in a year”

David Woolcock, now London-based global head of sales and business development at Eurobase:

• “I was the treasury manager for Credit du Nord in London, managing a dealing room of six people and responsible for a proprietary risk portfolio
• “It was very hectic in the run-up to the exit, which took place afterhours in London. The morning started with the normal pressure on the weak currencies. However, soon the selling of sterling really ramped up on rumors of heavy sales from a known source
• “With the money markets barely functioning and wild exchange-rate oscillations still occurring on very wide quotes for nickel and dime amounts, it was an eerie market that was full of ghoulish barrack-room …read more

  Source: "Black Wednesday" Memories Haunt Traders Ahead Of Thursday’s Referendum

      

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  Posted June 19th, 2016 in Uncategorized.