Last week, the EU’s Joint Committee of the European Supervisory Authorities (ESA), warned that ‘Brexit fatigue’ among financial firms was no excuse for not continuing contingency planning in the case of a no-deal scenario.
It warned a no-deal could be accompanied by sharp corrections on financial markets, such as falling asset prices and rising risk premia – so fund managers must have their Brexit plans in place by the end of October at the latest.
It appears from the report that fingers are being pointed at financial institutions for being sluggish in their Brexit preparations, with ESA noting “a slowing trend in Brexit-related authorisation activities in recent months”.
While it admits this may be due to firms postponing the transfer of their activities, or re-opening discussions with national competent authorities (NCAs) to scale down the transfer of their resources, EU regulators appear to be declaring they have done all they can to help minimise the chaos of Brexit – and now it’s up to firms to simply get on with it.
"We do not believe it is possible to forecast the ultimate outcome of the Brexit process"
As the report says: “Considering the variety of measures undertaken by the ESAs and national supervisory authorities and other competent authorities, the industry in the EU should be well informed and prepared to manage risks from a micro-perspective.”
How real is the Brexit lethargy threat?
Is it fair to suggest European fund managers have been ignoring Brexit and have a bad case of ‘Brexit fatigue’? Perhaps unsurprisingly, none of the fund managers Expert Investor spoke to believed they were suffering from Brexit lethargy or were sweeping the issue under the carpet.
For Allianz Global Investors, its Brexit plan has not changed since the spring when the UK was initially due to leave the EU.
“We’re well prepared,” a spokesman for Allianz GI explained. “[Our] Brexit initiative has involved keeping a close eye on things and, as a global business, we already have a significant footprint in both the UK and continental Europe.
“The feeling here remains. In terms of our own business, as opposed to market implications, nothing has really changed compared to the situation in March. We still have a Brexit initiative where we monitor regulatory developments around and related market infrastructure topics. We’re prepared, deal, no deal or further delay, come the end of October.”
While Swiss fund group UBS Wealth Management declined to comment on any Brexit plan it currently has in place, it, like many investment firms, is holding out on a deal eventually being secured by the UK, and is reluctant to believe a no-deal will come to fruition.
“We do not believe it is possible to forecast the ultimate outcome of the Brexit process, and we don’t attempt to do so. But we believe that in the short term the market is overstating the risk of a no-deal Brexit,” the fund manager said in a recent Brexit report. “Even if Prime Minister Johnson is willing to countenance a no-deal exit, he faces various barriers.
“As such, while a no-deal Brexit remains possible over the longer term, our view is that the most likely path in the short term is for a further extension to the UK’s 31 October exit day, either due to a change in stance from PM Johnson, or in the case of a general election.”
Duncan Lidgitt, head of legal, Europe at Muzinch, said the firm has made extensive preparations for Brexit and expects to be able to continue providing investment management services to all its clients, whatever form the exit takes.
“We would welcome further equivalence and cooperation agreements between UK and European regulators to work together to help smooth any transition,” Lidgitt said.
Waiting for clarity
Indeed, while ESA is insisting European fund managers should be equipped for a no-deal scenario to help minimise financial disruption, in reality many firms are also still waiting for clarity from policymakers surrounding important issues, such as how to deal with UK shares and derivatives.
Thus, preparing for Brexit while EU and UK regulators are still squabbling and can’t reach an agreement over these issues may seem an impossibility. If any fatigue is being felt, it may be due to how Brexit is being managed by politicians and policymakers rather than a reluctance by firms to get a plan together.
For example, with only just over a month to go until the UK prime minister Boris Johnson plans to pull the country out of the Eurozone, deal or no deal, the Financial Conduct Authority’s (FCA) chief executive Andrew Bailey is still pleading with EU financial regulators to offer UK equivalence permits in the event of a no deal. This would allow EU-based fund managers to carry on doing business in the UK.
Speaking at a Bloomberg event earlier this week, Bailey said fund managers and investors needed guarantees they could gain long-term access to London’s derivatives trading market, according to reports in the FT. The EU’s temporary permit, which gives EU investors and financial institutions access to UK clearing houses in the event of a no-deal Brexit, is due to expire in March 2020.
For Netherlands-based asset manager NN Investment Partners, the trading of derivatives after Brexit is an important issue to consider. It plans to have a clearing arrangement with Eurex, regarded as the largest European futures and options market, by the end of 2019. This would be its alternative to using British clearing house, LCH.
“A hard Brexit has a major impact on the European derivatives market. Pension funds are impacted mainly because interest rate swaps are typically traded bilaterally with British counterparties or cleared through clearing brokers, whether British or not, with a British central counterparty.
“Our re-papering activities are aimed at having a minimum number of two or three EU27 counterparties for each portfolio we manage in order to meet our best execution obligation for each client for whom we trade in bilateral derivatives,” NNIP said in a Brexit paper earlier this year.
Swiss fund manager Pictet, which manages some of its investments in London, has revealed an optimistic approach to Brexit, and believes policymakers will be quick to deal with any negative disruptions in the markets.
“We would assume a continuation of normal trans-border activity, with either transitory arrangements or some recognition of regulatory equivalence or ‘super-equivalence’,” Thomas Costerg, senior economist at Pictet Wealth Management stated in an August Brexit report.
While the firm said the Brexit saga has had a massive impact on FX markets, it believes a weaker pound is not necessarily bad for UK equities, at least for international companies, as it can translate into higher earnings and therefore higher stock prices.
“Any initial slide in UK equities in reaction to a no-deal exit could quickly be reversed by a vigorous policy response by policymakers,” the fund manager concluded.