BREXIT Q&As - PAINTING BY NUMBERS

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1 BREXIT Q&As - PAINTING BY NUMBERS POLICY AND TECHNICAL August 2016

2 Brexit Q&As painting by numbers August 2016 Contents EMIR...2 SEPA...2 Pensions...2 EIB...2 Interest rates...3 Small & Medium sized Enterprises (SMEs)...3 Treasury personnel...4 Hedging...4 Fraud, risk and governance...4 Future cash levels...4 Passporting...5 Trade finance...5 In-house banks...5 IPO market...6 Treasury prominence...6 The ACT hosted a webinar on Brexit a little over a week after the UK s referendum decision to leave the EU. With a record number of attendees and not enough time on the webinar to answer all the questions asked, we endeavoured to provide answers to those questions below. As new issues and questions arise over the coming months we will continue to update this list. Further information, webinars and resources including the ACT s Briefing Note: Brexit 2016 are available at The Association of Corporate Treasurers A body established in England by Royal Charter. 68 King William Street, London EC4N 7DZ UK. t +44 (0)

3 EMIR 1. Would the UK government not want to drop EMIR and create something more suitable instead? EMIR and European Payment Council (EPC) regulations, like all EU regulations, are directly applicable in all EU member states. After Brexit, EMIR and more generally, EPC regulations would no longer apply. The UK could, of course transpose EMIR into domestic legislation. The UK could, alternatively, alter or choose not to replace the current EU regime. However, significant change might be unlikely as the basic principles of EMIR and EPC regulations emanate from G20 commitments. It is of course possible that any successive EMIR regime could be simpler; EMIR reporting requirements have generated some confusion, suggesting that given the opportunity for reform the UK Government could come under pressure to make them less onerous (for example, by requiring the completion of fewer data fields and applying higher minimum thresholds of risk exposure). Note that some elements of EMIR (such as risk mitigation requirements and clearing obligations) have wide extra-territorial effect and will continue to apply to UK firms irrespective of the UK s future relationship with the EU in the future. SEPA 2. Do you feel there is potential for the UK to be pushed out of the SEPA agreements across the EU? Participation in the Single Euro Payments Area (SEPA) is not conditional on EU membership, but once the UK ceases to be an EU member state and if the UK does not join EFTA or negotiate separate trade agreements in the same way other non-eu states have done, it is possible that charges could be levied on SEPA payments from the UK. It would seem unlikely that UK based companies will be prevented from collecting or making SEPA payments in the short term. In addition, since the goal of SEPA is to make the flow of payments more harmonised, it would be in the interests of the EUR and the UK to be mindful of the requirements of SEPA. Pensions 3. Many pension scheme deficits will be rising in light of new historic low interest rates. Are you seeing any changes from businesses in response to pension risk? As at the time of writing (July 2016) this is too soon to call. Businesses continue to look at how they can limit an increase in their scheme deficits using a variety of tools. EIB 4. If your funding is from the EIB would that cause a problem and would the EIB expect to have the funds repaid as soon as possible? The Association of Corporate Treasurers 2

4 The future status of EIB funding is uncertain. The EIB s constitution does not, as such, make it unlawful for it to lend outside of the EU, but as detailed below, the UK s relationship with the EIB will likely be part of the UK s exit negotiations. We understand that certain recent EIB loan agreements have contained a Brexit Mandatory Prepayment Event. Of course, a close look at the actual terms of your facility would be sensible, whether recent or not. After the referendum result, on 24 June 2016, the EIB issued the following statement: At present the UK shareholding in the EIB remains and the EIB s engagement in the UK is unchanged. Any change to the EIB s shareholder structure or lending activity is a decision for the Member States. We expect that the EIB s shareholders, the 28 EU Member States, will discuss the EIB s engagement in the UK as part of broader discussions to define the future relationship of the UK with Europe and European bodies. At present, the EIB s shareholders have not requested the Bank to change its approach to operations in the UK. It is premature to speculate on the impact of the referendum result on the EIB, including the Bank s future relationship with the UK government and its future engagement to support long-term investment in the UK without clarity on the timing, circumstances and conditions of a withdrawal settlement. Interest rates 5. How long can we sustain negative rates in Europe? One could argue that they can be sustained for a long period of time. The question is when will they no longer be required. Growth and inflation across Europe continue to remain low and the economic outlook remains weak. Upcoming elections across Europe may continue to delay and recovery in EU countries. 6. What impact will bank base rates being lower for longer have on banks' willingness to lend? Banks will continue to be selective about who they lend to. Balance sheet growth is no longer a driver for many banks as the impact of CRD IV and Basel III add to the cost of lending and borrowing. The government will need to continue to look at other institution (such as the British business bank) to support borrowers. Small & Medium sized Enterprises (SMEs) 7. How much will UK SMEs be impacted? In the short term SMEs that export goods with few imported inputs will be able to more effectively compete on a global stage. Those that have significant imports may find it more difficult. A general decline in the UK economy could hit SMEs as they may have fewer options to diversify their business risks. The Association of Corporate Treasurers 3

5 Treasury personnel 8. Given that corporate treasury teams employ a lot of EU and non-eu nationals do you have a view on what will happen to the workforce? Although the impact of any change in immigration policy may not be felt for some years, in the immediate term, EU personnel in the UK may be concerned about the current environment and future job security in the UK. Businesses may therefore wish to take positive steps to reassure and retain key EU personnel, including (practical and financial) support with residency, visa or work permit applications. Some EU nationals who qualify for permanent residence because (amongst other requirements) they have lived in the UK for a period of 5 years, may wish to apply for permanent residence. Hedging 9. Do you think Brexit will have a significant long term impact on hedging costs? Brexit per se may not influence hedging costs but there are other long term trends that may do so. At some point markets and risks will stabilise and spreads will narrow once again. Liquidity in key currency pairs will provide competitive pricing though there is a long term trend (without Brexit) for genuine liquidity to shrink away from smaller banks to a handful of large global participants. Fraud, risk and governance 10. Could you give us a little more details on the fraud risk facing corporates? Surely Governance control is of paramount importance? During periods of uncertainty and cuts in staffing levels, payments fraud typically increases. In addition new payment methods are opening up new opportunities for cybercrime. Companies need to reassess their current governance framework to make sure it remains robust. This includes asking for external assistance (where necessary) to ensure that new risks have been properly considered. Future cash levels 11. It was mentioned on the Brexit webinar that you expect some corporates to see a significant reduction in cash reserves in the future. It would be good to understand why this might be an expectation? During periods of uncertainty, there is a tendency to hold onto cash and liquidity for a number of reasons including reducing counterparty risk, providing operational flexibility and building buffers for unplanned crises or acquisition opportunities. As market conditions nomalise, cash holdings may fall. The Association of Corporate Treasurers 4

6 Prospectus Directive 12. What impact do you expect there to be on the Prospectus Directive? Would the UK implement a similar directive? The Prospectus Directive is currently being reformed and a new Prospectus Regulation, replacing the current Prospectus Directive, is likely to be finalised by the end of 2016, becoming effective 12 months thereafter. It is likely that the UK will still be in the EU at this time. The result of the referendum is unlikely to have a significant impact on the legislative process for the new Prospectus Regulation or on its eventual contents as the reform has not been radical and a majority of other Member States have broadly similar positions to the UK. The Prospectus Directive applies not just to the EU but also to the EEA and therefore if the UK joins the EEA the prospectus regime will apply in the same way. If the UK were not to join the EEA, the UK would have the opportunity to put in place different legislation in response to market requirements. While the precise detail of that is hard to predict, it is very likely that the UK will put in place some equivalent legislation, reflecting global standards of securities regulation. Under the current prospectus regime, a prospectus approved in one EEA state can be used to make a public offer in another member state. If the UK were not to join the EEA, a prospectus approved in the UK could not be used for a public offer in the EU, though the proposed new Prospectus Regulation envisages a process for third country regulatory documents being used in the EU if the European Commission deems the third country legislation as equivalent to the EU prospectus regime. Prospectus passporting is only relevant in the context of offers made to true retail investors (as offers made to qualified investors are exempt from the requirement to publish a prospectus). Passporting 13. Will MIFID II achieve the same as passporting? The general passporting position is transposed into MIFID II however MIFID II will create two regimes, one for retail clients and one for professional clients, for third countries doing business with EU entities. The UK could be a third country issuer post-brexit, as detailed in the response to question 12. Trade finance 14. What potential effect could there be on trade finance? Specifically when providing bank guarantees to customers in Europe? Assuming that the risks for individual customers and countries in the EU do not change, trade finance should be relatively unaffected. Bank appetite for trade finance may change as banks themselves restructure their operations and balance sheets (This is not a direct result of Brexit). In-house banks 15. Will Brexit affect EU-based in-house banks or shared service centres serving a UK company? The Association of Corporate Treasurers 5

7 Many organisations run in-house banks (IHBs) and shared service centre (SSCs) outside of the UK. The benefits of EU based locations traditionally include movement of staff and attractive tax rules. Depending on the final Brexit agreement, the location of an IHB or SSC may need to be reconsidered and it may be better located outside of the EU. IPO market 16. Can you share any thoughts on the IPO market in the next 2-3 years while negotiations are underway, will this stagnate? Investors will always be interested in IPOs where long term value is identified. The period of negotiation will not affect this but it may result in different valuations and therefore which companies IPO. Treasury prominence 17. Does Brexit mean Treasury will remain at the board table? If so how does this impact the profession and the ACT? Yes, from experience, the profile of treasury with the board is always heightened through periods of uncertainty (viz 2008). Liquidity, cash management and FX risks will remain of key concern to Boards. Treasurers will need to respond quickly and flexibly to the changing economic and business environment to ensure that risk mitigation remains embedded in business decisions both during negotiations and once the UK leaves the EU. The ACT will continue to work closely with regulators and key decision makers through the negotiation process (influence) and will help the profession identify the key questions to address and the appropriate tools to employ (inform). Disclaimer: Neither the Association of Corporate Treasurers nor any of its officers or employees nor any persons from whom it seeks advice in response to questions can accept responsibility or liability (express or implied, contractual, tortious or otherwise) for the correctness or timeliness of any response. Accordingly, users should not rely on such advice but should consider taking their own professional advice. In no event should any response be viewed as investment advice. Any user who requires advice on investments or securities should obtain it from an organisation duly authorised under applicable legislation. The Association of Corporate Treasurers 6