ISDA, FIA offer webinars, memos and more while regulators and securities firms figure out the next move.
It looks as if June 23, 2016 will be another day that will live in infamy. Some of the infamous ripples from the Brexit crisis are making their way across the pond to the United States.
Key industry organizations, regulators and securities firms are taking initial actions, formulating strategies and watching with interest as the Brexit troubles spread globally.
ISDA Offers Preliminary Legal Information
In its initial statement, the International Swaps and Derivatives Association (ISDA) acknowledges that the U.K. referendum vote to leave is “momentous” and will have significant implications for financial markets.
ISDA also offered information about the legal issues that are likely to crop up because of Brexit including: the choice of English law to govern the ISDA Master Agreement; the choice of English courts/arbitral tribunals as the dispute forum under an ISDA Master Agreement; bank resolution issues; insolvency issues; and collateral issues.
Here are some highlights from ISDA’s legal information guidance:
- Brexit and the EU Treaties: “In the case of an Out vote, the U.K. will cease to be an EU member state around the end of June 2018, the earliest. This requires the UK government to give notice of the U.K’s intention to withdraw fairly soon after an Out vote.” When the U.K. invokes Article 50 of the Treaty on the Functioning of the E.U., “treaties shall cease to apply to the member state in question from the date of entry of the withdrawal agreement or, failing that, two years after the notification of the withdrawing member state.”
- The European Free Trade Association (EFTA)/ European Economic Area (EEA) scenario: “If, upon Brexit, the U.K. were to become a European Free Trade Association (EFTA) member state and part of the European Economic Area (EEA), several EU instruments would still apply — in particular, the E.U. directives on financial collateral arrangements (FCAD), winding-up directives for credit institutions (CIWUD), bank recovery and resolution (BRRD) plus the E.U. regulations on insolvency (EUIR), and choice of law governing contractual and non-contractual obligations (Rome 1 and Rome 2 Regulations) plus reciprocal recognition of commercial judgments (Brussels 1 Regulation). This is especially relevant to the English law ISDA opinions’ insolvency analysis, plus the choice of law and forum analysis in the ISDA Master Agreement (ISDA MA) under Sec.13 (a) and (b)(i)(1)(B) and the Convention Court definition in Sec 14. However, EFTA membership for the U.K. would neither be automatic nor immediate. The U.K. was an EFTA member state until its accession to the EU in 1972, when the U.K. formally left EFTA. A new request for EFTA membership would have to be filed and agreed to by the four other EFTA member states in accordance with EFTA rules and procedures, which are not linked to the EU in any way.”
For a review of the full legal overview information, ISDA offers a link http://bit.ly/2940KOP and a link to a recent webinar with London lawyers that review the major legal challenges: http://bit.ly/297TTpb
FIA Offers a Memorandum, a Webinar and a Working Group
The Futures Industry Association (FIA) declared its support to its members “during what will undoubtedly be a protracted period of transition,” according to FIA officials.
“To that end, FIA engaged Allen & Overy to prepare a memorandum outlining likely next steps and near-term consequences for the cleared derivatives industry. The report assumes that the UK Government will now begin the process of negotiating its withdrawal from the EU, and focuses on the exit process itself, potential financial and economic volatility, documentation concerns for our industry, and the regulatory issues that must be addressed,” according to the FIA.
The FIA held a webinar on Tuesday, June 28, on “the near-term consequences for the cleared derivatives industry,” FIA officials say. The webinar was a follow-up to the FIA memorandum “Brexit, what now for the cleared derivatives markets?” prepared for FIA by Allen & Overy
The memorandum is at http://bit.ly/293OpZq while the recording of the webinar is at: http://bit.ly/29gRtqE
The webinar covered the reminder from the Financial Conduct Authority (FCA) about the ongoing application of E.U. laws in the U.K. until Little Britain actually leaves. The webinar also delineates the FIA’s plans to “support our members through the protracted period of the U.K.’s transition out of the EU,” officials say.
The FIA has also “established an internal working group of senior FIA staff to help develop our agenda in this area,” officials say. “The group will include Simon Puleston Jones, head of Europe; Corinna Schempp, head of EU Policy; and Mitja Siraj, vice president of legal, Europe.” The association will form “one or more member working groups in due course” to create webinars and other educational resources.
Lastly, the FIA is encouraging members to submit questions and concerns to a dedicated email address: UK-EUrelations@fia.org .
BlackRock Makes Predictions
Asset manager BlackRock predicts that the UK divorce will be “messy, drawn out and costly,” according to a bulletin. “It involves unpacking U.K. and E.U. laws, and striking trade deals with a spurned E.U. and the rest of the world. We expect potential losses in services exports and investment flows to overwhelm any benefits of lower payments to E.U.”
The firm also foresees “a weaker euro over time and pressure on European shares, credit and peripheral bonds such as Italian government debt due to likely European job losses and lower growth.”
In other predictions, the firm says:
- There may be “limited pressure on government budgets … as high-quality government bonds are in demand in a low-rate world;”
- The Bank of England’s first priority will be “to provide ample liquidity to avoid any funding stresses, in our view. The magnitude and volatility of the British pound’s fall will likely dictate further responses. We expect the central bank to cut its 0.5% policy interest rate to zero soon, and see it returning to quantitative easing rather than pushing rates into negative territory.”
- Credit rating agencies will “quickly adopt negative outlooks for U.K. government bonds, with downgrades to follow.”
- Indiscriminate selling “could translate into opportunities. U.S. and Asia markets are only marginally affected by the U.K.’s exit from the EU, and are supported by a mix of easy monetary policy and economic growth.”
- The large-cap FTSE100 Index will “outperform the more domestically focused FTSE 250 Index.”
- And the U.K. currency drop benefits large companies with “overseas earnings, whereas domestic sectors such as homebuilders, retail and financials look vulnerable.”
Regulators, Goldman Sachs and God Are Watching
Like other U.S. authorities, officials at the Federal Reserve say they are “carefully monitoring developments in global financial markets, in cooperation with other central banks.” The Fed says it is “prepared to provide dollar liquidity through its existing swap lines with central banks, as necessary, to address pressures in global funding markets, which could have adverse implications for the U.S. economy.”
Immediately after the vote, CFTC Chairman Timothy Massad and SEC Chair Mary Jo White acknowledge that they are monitoring the situation. More is likely to come from these regulators as the Brexit crisis continues.
Echoing executives at other major sell-side firms, Lloyd C. Blankfein, chairman and CEO of Goldman Sachs, stresses that the firm will act to protect clients.
“We respect the decision of the British electorate and have been focused on planning for either referendum outcome for many months,” Blankfein says in a statement. “Goldman Sachs has a long history of adapting to change, and we will work with relevant authorities as the terms of the exit become clear. Our primary focus, as always, remains serving our clients’ needs.”
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