Yves here. We’ve flagged some of the loud warnings by high profile players like Airbus and BMW about the havoc continued Brexit uncertainty, as well as a hard or crash out Brexit. What is interesting about Don Quijones’ post is the degree to which banks have been complacent about taking serious Brexit preparation steps. On the one hand, we’ve read many press reports about how banks were looking into and applying for licenses, as well as looking at various major EU cities for more office space. Our PlutoniumKun reported that a favorite gym had become a casualty to Brexit, since the (former warehouse?) building in which it was located was being razed to build an office tower.
On the other, as Don Quijones indicates, a lot of firms have apparently taken initial steps but dawdled on the follow through.
I’m also not sure what to make about the Bank of England squealing about derivative contracts. I find it hard to take the figures they are tossing about at face value, simply because a significant proportion will expire before Brexit date and would presumably be replaced by agreements that would not be exposed to Brexit. Further, I’d expect ISDA or bank lobbyists to have been making noise before the Bank of England started sounding alarms.
Having said that, as we learned when Lehman failed, most derivative agreements have options in how they get settled (usually cashed out in some form) and you can be assured whoever has latitude in how the contract will be closed out will use that power to his advantage. I wish someone who was closer to the current state of play would identify what types of contracts might cause trouble if they could not be settled or novated neatly, and how big the economic (as opposed to notional) exposures might be there. I’m sure there is a real issue here, but I’d like to see the problem dimensioned much better than it has been so far.
Finally, a story in openDemocracy exposes something that clear has to exist but we haven’t seen much of, which is groups that see profit opportunities in Brexit and have been lobbying for it. And I don’t mean fuzzy headed “Oh, the UK can be the new Singapore” enthusiasts.
OpenDemocracy discusses the fracking industry as keen to escape EU environmental regulations:
In January I wrote about how the fracking industry could take advantage of a dirty Brexit. But it goes further than direct lobbying and trying to hijack the Brexit narrative. Companies are also enlisting the help of PR agencies who are hiring former ministerial and even prime-ministerial advisors to lobby for them.
The post continues to name quite a few names….
Construction and infrastructure giant Ferrovial has announced it is moving its international HQ from the UK to low-tax haven Amsterdam because of Brexit. The Spanish firm, which owns a quarter of the UK’s busiest airport, Heathrow, and runs its US, Canadian, Polish and UK operations from Oxford, says it needs to keep within EU legislation after the UK leaves the EU.
Airbus issued a stark warning at the end of last week that it may also consider abandoning the UK over Brexit, its strongest alert yet over the potential impact of Britain’s departure from the EU. A withdrawal without a deal would force it to reconsider its long-term position, potentially putting thousands of British jobs at risk, it said.
At the same time investment in Britain’s car industry has shrunk by half to the lowest figure since the financial crisis, according to figures from the Society of Motor Manufacturers & Traders (SMMT). In the first six months of 2018 investment in new models and factory improvements clocked in at £347.3 million, compared to £647.4 for the same period in 2017. BMW has warned that it will close all its UK plants in the event of a hard Brexit.
What companies, both domestic and foreign, want is greater clarity regarding the UK’s future relations with the EU as the cut-off date for reaching a preliminary agreement on Brexit terms grows ever closer. “Exit” day is scheduled to begin on March 29, 2019, at 11 p.m. GMT. That’s 274 days away, and there’s scant sign of any progress on key sticking points such as the Northern Ireland border, the so-called “passporting” of UK financial services, and a future aviation agreement between the UK and the EU.
Whatever the reasons for the potential departures from the UK, one of the things the recent constitutional crisis in Catalonia threw into stark relief is just how fickle and fearful money is, and just how quickly companies — even local ones — will up sticks if political developments in a particular region jeopardize their operations.
International banks and asset managers with large London-based operations are now scrambling to augment their EU outposts to mitigate the loss of passporting rights which enable them to offer financial, advisory and trading services to corporate clients across all EU states with just one local licence. JPMorgan is reportedly looking to expand its office space in Milan, where it already has around 250 staff, while Goldman Sachs is planning to double the number of staff in Frankfurt, which currently stands at 400.
Bank of America is merging its London-based subsidiary with its Dublin-based Irish entity, which will become its main EU base. It has also said it will expand its investment banking activities in Paris and shift some of its London-based back-office operations to Dublin. It is also transferring three of its most senior UK-based bankers to Paris in one of the most senior Brexit staff redeployments to date by a major bank, according to Reuters.
But moving key operations and staff across the channel is a costly, complex undertaking. Many companies would still prefer to play a waiting game, and most of the moves that have taken place so far have involved small parts of firms’ operations. But according to the European Banking Authority (EBA), which itself is relocating from London to Paris, time is running out. In an opinion paper released on Monday, it warned that City of London authorities and many UK-based banks were far from ready for a no-deal scenario.
“Financial stability should not be put at risk because financial institutions are trying to avoid costs,” the paper says. In a remarkable coincidence Monday also saw a separate warning from the ECB that any banks that haven’t submitted their licence applications for operating in the Eurozone by the end of the month could find themselves without a permit by the time of Brexit.
It didn’t take long for the City of London to hit back. On Wednesday the Bank of England warned that unless the EU accepted a temporary permissions regime for financial services, up to £29 trillion worth of financial contracts could be declared void in the event of a no-deal Brexit. Derivatives contracts could come to an end without fresh legislation from the UK and EU, the central bank’s financial policy committee said.
“UK and EEA parties may no longer have the necessary permissions to service certain uncleared over-the-counter (OTC) derivative contracts with parties in the other jurisdiction,” the bank’s financial stability report said. “Based on latest data, this could affect around a quarter of contracts entered into by parties in both the UK and EEA, with a notional value of around £29 trillion, of which around £16 trillion matures after March 2019.”
For the moment the EU — and in particular, the ECB — seems more interested in trying to gain a larger share of financial clearing, a lucrative business dominated for years by London. As we previously noted, the clearing business is the jewel in the crown of the City of London’s financial services industry. As such, it will not give it up lightly.
But as the clock continues to tick down, the war of words across the Brexit negotiating table is growing increasingly bitter and the potential for ugly consequences, intended or otherwise, increases. By Don Quijones.
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