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The likelihood of a no-deal Brexit is on the rise, forcing finance industry executives returning from summer holidays to scrub contingency plans before Oct. 31 (although that date might still be a moving target). Big firms have spent billions of dollars in the last three years to prepare for the day, and they remain confident -- as do regulators -- in their ability to manage the fallout. Vulnerabilities remain, though, and they could prove big headaches on Halloween. Here are the issues keeping bankers awake at night.
Midweek Start
Modern finance captures immense amounts of data about financial transactions to report to regulators. Whenever there is an update to coding systems, executives in charge of that plumbing like to have ample time -- often a weekend -- to test for operational hiccups. But Brexit is now scheduled for a Thursday, leaving firms to scramble before Nov. 1 to ensure the right data goes to the right regulators in the EU and U.K. Even more complicated is that Nov. 1 is All Saints’ Day, which is a public holiday in part of the EU but not in the U.K. There is little appetite so far for the U.K. to declare a bank holiday that day.
Contract Continuity
About 16 trillion pounds ($19.3 trillion) of swaps contracts between U.K. and EU traders mature after October. While the contracts will remain valid, the Bank of England and industry lobby groups have warned so-called life cycle events in the contracts -- such as extending the maturity of a trade -- could face hurdles. EU policy makers have ruled out resolving these concerns across the bloc, leaving it to national authorities to respond. BOE Governor Mark Carney, however, says the measures in France and Germany don’t do the job to his satisfaction. Meanwhile, banks are switching contracts one by one to new EU entities from their U.K. ones -- a process known as “repapering.”
Trading Venues
EU money managers will be forced to trade certain equities on EU venues and not in the U.K. Initially, the rule even applied to some stocks with a primary listing in London, including AstraZeneca Plc, Rio Tinto (LON:RIO) Plc and Vodafone Group (LON:VOD) Plc, but EU regulators softened their stance under pressure from lobby groups. The U.K. market regulator says the EU’s policy could still cause problems because some European stocks are heavily traded in the U.K. Also unclear is how the U.K. will respond, and whether Britain will require U.K.-based money managers to trade on venues in the country.
Legislative Hiccup
The U.K. government has been working for months to make sure financial regulations are enshrined in domestic law in the event of a no-deal Brexit. But legislation is still pending to smooth that process. If Parliament is suspended, lawmakers will have only a small period to pass the Financial Services (Implementation of Legislation) Bill. If they cannot, it will be harder for the U.K. to incorporate forthcoming EU policies into domestic law. That matters if the U.K. wishes to be recognized as equivalent in the eyes of the EU regulators, which would allow firms to trade across borders more easily.
Small Firms
A large volume of business in the European payments industry is handled by platforms based in Britain. There are 363 payments institutions and 151 e-money firms operating in the U.K., many of which process electronic payments between clients in the U.K. and 27 other EU member states. These firms will lose the ability to automatically do business in the EU after Brexit, and EU authorities are telling companies to speed up contingency plans. Revolut, one of Europe’s fastest growing payments companies, set up a new European entity in preparation for a no-deal Brexit, but is warning of disruptions if clients don’t register their identity.
Property Funds
U.K. property funds were among the most visible casualties in the chaotic aftermath of the June 2016 Brexit vote. When panicked investors rushed to pull hundreds of millions from the funds, several managers suspended redemptions because they weren’t able to quickly sell buildings and raise the cash to return. To prevent a replay, fund managers have been on a mission to increase the amount of cash they hold. In December they faced another test when Brexit jitters led to investor redemptions that depleted their cash piles. Several managers have been selling properties to build up cash buffers -- as high as 28% -- to weather a no-deal departure.