In Asia, financial firms begin Brexit contingency plans
US banks denoted to campaign for Britain to stay in EU
The Hong Kong exchange has begun a Brexit impact assessment, and some Asian asset managers are looking to set up new bases in mainland Europe amid growing concerns their operations could be disrupted if Britain votes to leave the European Union in a June referendum.
The central banks of Hong Kong and Singapore told Reuters they were also closely monitoring developments around the June 23 vote. A spokeswoman for the Hong Kong Monetary Authority warned of “significant uncertainties” in the event of an “Out” vote.
The contingency planning highlights concerns that Brexit, as Britain leaving the EU has been called, could have ripple effects in Asia-Pacific by cutting off the UK’s Asian finance investors from the EU financial market. Other regions are also making Brexit preparations.
Opinion polls have pointed to a close vote, though the most recent polls show rising support for Britain staying in the EU.
“A potential Brexit is an issue no organisation can afford to ignore,” said a spokesman for Hong Kong Exchanges & Clearing (Hkex), which took over the London Metal Exchange (LME) and its clearing house in 2012.
“We are carrying out an impact assessment for both the LME and LME Clear and are addressing the short-, mediumand long-term implications for both potential outcomes of the UK referendum.”
The bourse declined to elaborate on its impact assessment, though risk management experts said it would likely cover the legal, regulatory and operational implications of Brexit, as well as volatility scenarios and potential market disruptions.
Asian investors using Britain as their European base said they may establish operational bases in Frankfurt or Luxembourg, fearing an “Out” vote would disrupt their ability to offer services and products across the 28-nation EU.
“There’s lots of uncertainty. If the vote is “Out” would London be a platform for accessing Europe?” asked Sammi Shen, executive director at Shanghai Nord Engine Asset Management Group, a $3 billion Chinese investment management company which set up a London office only last year.
“We would find a European partner or set up an office in Europe: that’s our back-up plan,” she said, listing Frankfurt and Luxembourg as the preferred locations.
Britain’s financial services industry has attracted 100 billion pounds ($143 billion) in foreign direct investment since 2007, or nearly a third of the total, according to financial services lobby group City UK.
London has also sold itself to Chinese banks as the biggest yuan currency clearing hub outside Asia.
Leaving the EU could risk unravelling financial services agreements that have helped turn Britain into Europe’s financial powerhouse, accounting for a quarter of all EU financial services income, according to the Bank of England.
For now, a financial services company with a licence or ‘passport’ to operate in Britain can automatically offer its products and services throughout the EU, reducing compliance and operational costs. An “Out” vote could see Britain lose that critical access - a major concern for Chinese and Hong Kong firms, many of which have recently set up in London.
Asia-Pacific companies spent more than $1.7 billion on greenfield UK wholesale financial services investments in 2011-15, with China the largest average investor, according to FT data source Fdi Markets, excluding M&A activity.
A senior executive of a major Chinese asset manager which uses Britain as its EU base said he was worried his firm may no longer be able to distribute funds across Europe.
“We’ll ensure we don’t have all our eggs in one basket and will establish a fund management entity and fund platforms outside the UK to hedge our bets,” said the executive, who didn’t want to be named due to the sensitivity of the matter.
The executive and Nord Engine’s Shen said they would not abandon London as it would remain a major market and offers a deep talent pool.
More than two million people work in financial services in the UK and typically have the right under EU rules to work across the bloc without requiring work permits. Brexit could change that.
Michel Lowy, CEO of Hong Kong headquartered fixed income specialist SC Lowy, which has operated in London since 2012, said an “Out” vote was a concern due to potential visa restrictions: “Will people need a working visa overnight?”
If Britain opts out of the EU, London would have two years to renegotiate existing trade and services agreements.
“The problem is that there is really no precedent, and traditional free trade agreements don’t really cover financial services very well,” said Andrew Naylor, Singapore-based executive director at Cicero Group, a consultancy helping Asian financial firms weigh the Brexit risks.
Meanwhile, US financial regulators are demanding regular updates from Wall Street banks about their contingency plans should Britain vote to leave the European Union, banking and regulatory sources told Reuters.
Scenarios under scrutiny range from how their London operations would handle lengthy uncertainty if Britons opt to quit the bloc in a June 23 referendum, to whether they could still offer financial services in continental Europe from a non-EU Britain.
The Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC), which share responsibility for supervising US banks, have told the lenders to present specific plans for their businesses in the event of a “Brexit”, three sources said.
“We’ve been actively asked to do this within the last six weeks. It involves scenario planning, stress testing different outcomes,” said one banking source. “You pick a highly impactful, negative scenario that’s bad but plausible and you work through the implications for the business.”
As well as the US regulators, the Bank of England is also seeking similar information from domestic and foreign banks operating in London, said the sources, who wished to remain anonymous as the process is private.
London’s financial sector, home to many international banks, is among the industries with the most to lose if the world’s fifth-biggest economy leaves the EU, according to many analysts who say an exit could lead to thousands of banking jobs shifting to the euro zone.
The European Central Bank is pushing hard for banks to move euro-denominated transactions from London, which lies outside its jurisdiction, to the euro zone where it can supervise the business more easily.
A vote to leave would be particularly difficult for US investment banks since most run the bulk of their European trading operations out of London offices.
Many use a “passporting” system that enables them to offer services across the EU from their UK-regulated entities. If Britain were to leave it is unclear whether this would still be possible, or if the banks could trade certain types of European securities from London.
The Federal Reserve, FDIC and OCC declined to comment, as did the major US investment banks in London — Bank of America Merrill Lynch, JP Morgan, Citi, Goldman Sachs , and Morgan Stanley.
Goldman, Morgan Stanley, Citi and JP Morgan have donated money to the Britain Stronger in Europe group, which is campaigning for the country to stay in the EU, sources have said.
The contingency reporting exercise is part of the regulators’ normal supervisory work rather than a separate form of stress test, the sources said.
Banks are particularly concerned about a likely lag after any vote to leave before Britain and the EU struck a new deal on trade in financial services, disrupting both their operations and financial markets.
“We will all live with whatever comes out but if you don’t know what’s coming and when it’s coming, then that will really spook people,” the banking source said.
As well as the passporting issue, regulators have asked banks about how they might handle staff and their information technology operations across Europe, the sources said.
Stuart Gulliver, the chief executive of British-based HSBC , said in February the bank could move around 1,000 employees from London to its subsidiary in Paris in the event of a leave vote. (RTRS)
‘We’ll
ensure we don’t have all our eggs in one basket and will establish a fund management entity and fund platforms outside the UK to
hedge our bets.