Disorderly Brexit Would Trigger Mayhem in Derivatives Market
Disorderly Brexit Would Trigger Mayhem in Derivatives Market from Wolf Street
Time is running out. March 29 is the deadline. Urgent action is needed. But it’s not happening.
With less than six-and-a-half months to go before the UK’s deadline to leave the EU expires, progress is still lacking in the Brexit negotiations, in particular on crunch issues such as the Irish border and the equivalency of financial services. As the doomsday clock ticks down, jitters are rising on both sides of the English Channel, particularly the English-speaking one.
On Monday, Moody’s said the probability of a no-deal Brexit has “risen materially,” and “would be negative for an array of issuers.” Such an outcome could bring with it a host of ugly consequences for the UK economy, ranging from a further weakening pound to higher inflation and sliding real wages, as well as undesirable knock-on effects for EU economies.
The longer the uncertainty drags on, the more likely it is that companies and banks will activate plan-B contingency plans, which in many cases involve moving a large chunk of their UK-based operations across the Channel. Once those plans are activated, stalling or reversing them will not be easy.
Deutsche Bank is mulling transferring up to three-quarters of the capital it has invested in the City — estimated to be worth around €600 billion — to its Frankfurt headquarters, the Financial Times reported on Sunday, citing sources close to the bank’s senior management. Tellingly, Deutsche Bank hasn’t made the move yet, since it knows that relocating key operations and staff across the channel is a costly, complex undertaking. It would much prefer to play a waiting game in the hope that the need for such drastic measures can be averted.
Most of the corporate moves that have taken place so far have involved small parts of firms’ operations, with few jobs lost in the City. But that dynamic appears to be changing as the Brexit deadline approaches. According toRisk.net, UK-based brokers and traders have already started activating contingency plans for a no-deal Brexit. Not even a last-minute agreement between UK and EU politicians will be enough to reverse those plans, they claim.