How will Brexit complications affect risk profiles in the forex industry?

The Brexit process just got more complicated and uncertain. Recent headlines blared the latest twist in events: “The UK Supreme Court ruled in a 8-3 vote that an act of Parliament is required in order for the May government to trigger ‘Article 50’ and formally begin the UK’s withdrawal from the EU.”   The vote was a blow to the Theresa May government, which had argued that the referendum affirmative vote by the people was enough to trigger the exit process and that government officials need not encounter any more hurdles to proceed. Doing business as a broker in the UK just became more risky.

Not all was bad for the May government. Officials in Scotland and Northern Ireland, the former being the most vocal, had threatened legal action to prevent their respective jurisdictions from having to leave the EU, a perceived right as some had noted in the press. The Supreme Court, however, “also ruled that the government does not need to get the consent of the devolved governmental bodies in Scotland and Northern Ireland.” The ruling effectively added more doubt to the timetable of if and when the UK will ever cut its ties to the EU. Article 50 must be triggered before a lengthy two-year negotiation process can begin. Regulation and licensing issues, however, may be put on hold.

As one might expect, the forex market did react quickly to the news. The “GBP/USD” pair dropped 100 pips in value, down to 1.242, but it has recovered and presently sits at 1.258. So much for the UK Supreme Court’s ability to influence the value of Pound Sterling in the market. Short-term fluctuations do not a long-termed trend make, but Tuesday’s actions did reveal how tricky and how many twists and turns this exit journey might encounter, especially after Parliament begins its lengthy and heated debate. Does May’s government have the votes they need? Will populist movements across the EU ignite a new host of “Article 50” deliberations? How will forex brokers deal with the risk presented by these changes in their operating environments?

What were the initial concerns expressed by CEOs in the forex industry?

We are into our seventh month since the “Leave” victory shocked the UK, Europe, and the rest of the world from its heretofore complacency. As the picture so metaphorically implies above, an “unzipping” of sorts must now take place. May is on the record wanting to trigger Article 50 before April, and in that vein, she and her staff, within 24 hours no less, have submitted a Brexit bill to Parliament. If debate begins next week, then she might actually meet her self-imposed deadline.

Over the past several months, a number of CEOs for high-profile brokerage firms in the foreign exchange space have stated their opinions on the matter. Here is a brief recap of a few of the important ones:

• Drew Niv, CEO, FXCM: “I cannot assure you about what the future holds with any great degree of certainty as I know it just as well as any of you, but what I can tell you is this, London will remain FXCM’s European headquarters where most of its staff will work.  We are not abandoning the UK, nor our people there. The UK is one of the most important key markets for FXCM and that isn’t changing.”
• Glenn Stevens, CEO, GAIN: “The long-term implications of Brexit remain unclear for FX/CFD brokers operating out of the UK.  If the UK stays in the EEA, we understand the passporting rights of UK regulated firms would remain intact and firms could continue to do business in EEA countries as they do today” or “UK brokers will need to set up operations in another EU country to access clients in the EEA.  This will have a more significant impact on smaller brokers, due to the additional cost and complexity of managing operations under multiple regulators, as well as meeting each regulator’s capital requirements.”
• Kobi Gur, CEO, Leverate: “We will continue to see some volatility that will result in spikes according to the progress, or lack of it, with the discussions between the EU and Britain. We may see rumors and the domestic leadership battles being the influencers on volatility. We should also watch how FCA regulation will react to other regulators in the EU and vice versa, but it is a small fraction of the full and wider picture of Brexit.”
• Ed Eger, President & CEO, OANDA: “The longer term aftermath of the Brexit is unknown. It is said that it is easier to create the future than to predict it, but I will say that as policymakers in the UK and across Europe make important decisions, they will create trading opportunities for our clients around the world. This is what makes FX and CFD markets so interesting to trade.”
• Dennis De Jong, Managing Director, UFX: “There is a good chance that GBP/EUR is heading towards parity, i.e. the pound will fall to equal value with the euro. This uncertainty within the banking sector could lead to the migration of certain banks and bankers from London to other European cities.”
• Charalambos Psimolophitis, CEO, FxPro: “Looking ahead, the focus will be on the regulatory environment, but I don’t see that changing dramatically. London is the world’s major financial centre and will likely want to remain in the MiFID even if not in the EU, as Iceland, Norway and Liechtenstein do. There will be no benefit from re-inventing the regulatory environment from scratch.”

The “net/net” is that no one sees a need to move from London. A new registration may be required, depending on how regulators decide to adapt. Traders can expect high volatility, especially when anyone involved announces something in the press, and possible parity between the Pound and the Euro. The pressure, however, will be on smaller brokers, which may find additional costs for regulatory compliance and the need for segregated capital on a national basis too much to bear.

The UK Supreme Court ruling did remove a few layers of doubt.

As noted, the ability of Scotland and Northern Ireland (and also Wales) to delay the process has been diminished. The threat of a host of new referendums, one concern that was expressed quickly after the vote, seems diminished, as well, since the court basically found that, with regards to a treaty, a peoples’ referendum is “non-binding”. The government must continue to function in its governing role. It cannot be bypassed on issues that it had enacted in the past.

It is surprising how quickly the May administration submitted its bill to Parliament. We suspect that it was already prepared on a contingency basis, in case the court did not rule in the government’s favor, as happened. Does May have the votes? Per one report, “Any bill is likely to be passed with an overwhelming majority after Labour Party leaders signaled that they would not seek to block it.” Opposition party members, however, have obstruction plans on the table. They plan to submit several amendments, if only to influence how eventual negotiations with the EU transpire.

Despite more clarity on next steps, British businesses remain in high anxiety over future prospects. Prime Minister May, in order to assuage these fears, laid out what has been termed an “Industrial Blueprint”. She recently announced a detailed strategy that sounded as if she wanted to “Make the UK great again”. Per one analyst’s summarization, “Prime Minister May wants the City of London to retain its status as the center of economic activity in Europe. At the same time, she wants to seal up Britain’s borders and seek alternative relationships with trading partners elsewhere. The Prime Minister is in the process of appointing ‘champions’ for targeted industry sectors.”

Will this outline of an operating framework sooth the collective minds of British banks and companies, as well as those for foreign-based corporations? The original goals of the Brexit referendum followed populist pronouncements: 1) Freedom from the European Court of Justice; 2) Re-negotiated access to the EU market, and 3) Control of its borders. For what it is worth for the moment, PM May puts her first priority on controlling immigration, even if it means giving up a bit on market access.

What have been the reactions across the channel?

Following May’s announcements, European Commission chief Jean-Claude Juncker told the European Parliament that, “For my part, I will do everything so that the negotiations reach a balanced solution, with full respect for our rules. I welcome the clarifications given by Mrs. May, but I said to her last night that a speech will not launch the negotiations. There will be an unprecedented negotiation which must finish within two years and the consequences will be considerable for the United Kingdom, its 27 partners and the whole union.”

Maltese Prime Minister Joseph Muscat repeated an often heard opinion that, “We want a fair deal for the UK but that deal necessarily needs to be inferior to membership. This should not come as a surprise to anyone — indeed thinking it can be otherwise would be a detachment from reality.” Various ministers have stated similar reactions, but the fear is that, if things move too quickly and easily and if the British seem to be successful in their plans, then there could be a landslide of other nations charging to the ballot box to execute Article 50 in haste.

A building wave of populism has swept through the UK and the United States, building momentum before it crashes against the European continent. There are several elections occurring in the EU over 2017. Per one pundit’s warning, “What if Brexit is followed by Frexit, Grexit, Italeave, Polend, Hunxit, Czechout, Finish and others? The domino effect could kick in any time. There is a certain chance that the entire EU will dissolve.”

Concluding Remarks

Is Brexit a foregone conclusion? Are we in for more uncertainty and volatility, as populist notions gain momentum across the EU? Is your forex broker positioned to adapt to changes in its environment without missing a beat? The UK Supreme Court ruling actually removed more obstacles than it created. Yes, Parliament must be involved and finalize the decision to leave, but what then? Opposition attempts may devolve to adding a few amendments along the way, but nothing catastrophic.

If there is to be a catastrophe, it will entail more exits in the EU that could spell the doom of its latest experiment in cooperation. Volatility and financial pressure could reshape the entire forex trading landscape in Europe. To be forewarned is to be forearmed!

Chris Lee

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