Currency markets are taking the possibility of a no-deal Brexit seriously.
The pound, at $1.28 against the US dollar and €1.11 versus the euro, is at its lowest level for almost a year and we shouldn’t be surprised. Even Brexiters who imagine sunny uplands in the long term usually concede that a no-deal Brexit would mean a thump for the UK economy on the way out.
But there is a crucial short-term question about a “no deal” outcome. How literally should it be interpreted? If it were to mean nothing whatsoever being agreed about the continuity of financial contracts on day one of Brexit, that’s alarming. There would be a real risk of mayhem in the markets.
Contract continuity is the technical territory that the Bank of England and the Financial Conduct Authority have been banging on about for months in their warnings about “cliff edge” risks. Here’s Andrew Bailey, the head of the FCA, in March: “Insurers in the UK and the European Economic Area may not be able to pay claims, or receive premiums from policyholders in the other jurisdiction. In the UK this could affect around £27bn of insurance liabilities and 10 million policyholders, while in the EEA the numbers could be around £55bn of liabilities and 38 million policyholders.”
If one includes derivatives, such as hedges against interest rate and currency movements, the numbers become enormous – £26tn on the FCA’s arithmetic. Those contracts would not become invalid overnight but, as Bank officials have consistently pointed out, moving them across borders at speed would be hellish. Article 50, as governor Mark Carney remarked wryly in June, was not designed with the derivatives market in mind.
Everybody assumes the cliff edge will be avoided, not least because the EU has more to lose than the UK. Dutch pensioners whose funds are backed by UK insurance companies will want their pensions to arrive without interruption, for example. On the UK side, a so-called “temporary permissions regime” for EU financial firms is ready to be implemented.
The point, though, is that the process needs to be two-way. Even if a broad EU/UK withdrawal deal, complete with transition period until the end of 2020, proves elusive, agreement is needed on contract continuity. If not, financial markets will be operating in the dark.
The good news, of a sort, is that senior City figures reckon the basic documentation is straightforward. Signing up to the details is the work of an afternoon, says one. Even at the eleventh hour, investors might trust that the EU would co-operate since the mutuality of interest on this narrow, but crucial, area is obvious. It’s a matter of financial stability in both the EU and the UK.
What if agreement doesn’t happen, though? What if contract continuity gets lost in a negotiating breakdown on the wider trade matters? One suspects the markets would throw such a tantrum that the politicians would be forced back to the negotiating table. But the process could be extremely messy. Seven months from Brexit, it’s astonishing that this crucial technical territory is still unresolved.
Barclays’ activist investor is struggling to rally others behind him
Edward Bramson, the activist hedge fund operator with a fearsome reputation, isn’t living up to his billing at Barclays. His Sherborne fund was revealed in March to have bought a 5% stake in Barclays and, notwithstanding Bramson’s usual slow runup, we had expected a few bouncers to have been bowled at the board by now.
Instead, Sherborne’s update to its own investors this week was limp. The manager is “engaging with Barclays concerning the issues of, inter alia, capital allocation, quality of earnings, capital adequacy, cost structure, and the search process for and mandate of a new chairman”, it said.
At a push, the reference to Barclays chairman, feng shui fan John McFarlane, could be read as spiky. But having a chat about the recruitment process is not the same as demanding that McFarlane leaves before he wants to go. The other items of Sherborne’s list were general. There wasn’t a specific demand in sight.
The game will only start in earnest when Bramson sets out his views on Barclays’ investment bank. Does he want it to be sold, merged, demerged, or slimmed down to fund a return of capital to shareholders? All were regarded as possible demands in March.
Perhaps he’ll come to life in the autumn. Or perhaps he’s discovering that most Barclays’ shareholders have a limited appetite for another strategic U-turn. Even with the shares limping along at 191p, investors seem oddly supportive of McFarlane and the chief executive, Jes Staley. Bramson’s doubters always said he would struggle to stir a rebellion at a large regulated bank. They’re winning the argument so far.
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