Some Brexit pragmatism among the market disorder

There is not much of 2018 left in which to get deals over the line if you pull back now, so the likelihood is that in many cases the financing can gets kicked down the proverbial road into 2019

Viewpoint
Keith Mullin
Keith Mullin

Markets are starting to feel a little disorderly. There’s a distinct sense of disquiet in London and around Europe as stock prices dangerously yo-yo and give up year-to-date gains, as credit spreads widen (European high-yield bond yields hitting the wides of the past couple of years), and new issues are cancelled in both debt and equity capital markets.

Some issuers are opting to sit on their hands in hopes of riding out the general volatility. Ditto investors, who in many cases need to pay attention to hefty portfolio losses. The market certainly isn’t closed but unless they’re either committed to a timeline or need for any number of reasons to print (like needing the money), now probably isn’t the best time to push ahead. Unless, of course, you believe things will only get worse.

There is not much of 2018 left in which to get deals over the line if you pull back now, so the likelihood is that in many cases the financing can gets kicked down the proverbial road into 2019. With that volatility we had earlier in the year that derailed a lot of transactions, some investment banking desks aren’t going to make budget. That means a lousy bonus season for some.

With Italian political tensions with the EU, global trade stresses, weakness in certain emerging markets, the threat of a no deal Brexit, and financial market volatility as its backdrop, the ECB opted to keep its key interest rates unchanged at the meeting of its Governing Council on October 25. ECB president Mario Draghi said rates are expected to remain at their present levels at least until summer 2019.

Net purchases under the asset purchase programme will continue at €15bn until the end of the year and could end after that (if the data jives with the ECB’s inflation outlook). But as Draghi was at pains to stress, stimulus will be with us for an extended period via re-investments of maturities from the huge stock of securities acquired under the APP and via enhanced forward rate guidance.

Amid the volatility and broad tensions, the tedium of Brexit negotiations continues to weigh on European sentiment. You have to live in the UK to really appreciate the sheer volume of coverage dedicated to Brexit minutiae. It’s depressingly mind-numbing and I just wish it would all go away.

But while shabby adventurist politicians continue to posture, spout their double-talk and wage their internecine warfare at our collective expense, could whatever botched outcome they come up with be smoothed over by regulators and civil servants via old-fashioned pragmatism? I wonder.

You may not like everything the UK’s regulators and supervisors do but they do have a reputation for getting on with it. Sam Woods, the Bank of England’s deputy governor for Prudential Regulation and chief executive of the Prudential Regulation Authority; and Andrew Bailey, chief executive of the Financial Conduct Authority, double-tagged at a banquet at the Mansion House on the same day as the ECB met. Among other things, they tackled Brexit.

With a smooth transition with no cliff-edge risk as the end-game, Woods listed three positive actions.  First: the Temporary Permissions Regime (TPR), which will allow for a three-year bridge for EU firms from the time of the UK’s exit in March 2019 while they seek authorisation to continue doing business in the UK. “We encourage all firms to opt into the regime because it will provide certainty until March 2022, independent of the existence and duration of any wider implementation period,” he said. “This is a straightforward, common sense way of lowering the risk of disruption to the City of London.”

Woods also referenced efforts to avoid disruption to financial contracts, including temporary recognition and run-off regimes so that contracts written before Brexit can still be cleared and serviced after it. He urged the EU27 to take similar steps. “I see no tension on this issue between the interests of regulators and firms – we all want to reduce the risk of disruption”.

As his third point, he added: “just in case things go badly we have been working with firms to ensure they have in place liquidity sufficient to accommodate a severe dislocation in financial markets”.

Bailey assured us that the FCA is on course to be ready for a hard Brexit. He stressed the importance of two-way co-ordination to avoid disruption in the event of a no deal. He is super-keen that permanent post-Brexit arrangements continue close alignment with the EU – without the UK being a rule taker.

He wants MoUs and other practical arrangements in place to support cross-border supervision and data sharing. “This technical regulator-to-regulator co-ordination is essential to minimise disruption in a no-deal situation,” he said. To remove cliff-edge risk, he called for the UK and EU to commit early to reciprocal equivalence decisions on each other’s regimes: “our work to onshore the EU rulebook… demonstrates that on day one, the UK will have the most equivalent framework to the EU of any country in the world.”

Bailey urged large international banks operating in the UK that for non-EU clients they should only consider moving activity away from the UK “if it is demonstrably in the interests of the client to do so”.

Who knows if any or all of the above will actually happen, but amid the gloom of geopolitics and disorderly markets, there’s nothing like some straightforward practicalities to lift the spirits.

Or am I just dreaming?