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By Paula Martín Camargo
British PM Theresa May finally found a way around for the Northern Ireland border quandary and for an eleventh hour diplomatic spat with Spain over Gibraltar that saw the Spanish Government threatening to block the accord if it wasn’t given veto power over The Rock’s future relation with the EU. May got EU leaders to endorse the draft Withdrawal Agreement and a political declaration on the framework for the future relationship, but lost some major cabinet members like Brexit Secretary Dominic Raab, who resigned and branded the deal as “worse than staying in the EU”. The next major hurdle May must overcome if the legal texts are to be enshrined in UK law is waiting for her at home.
The Prime Minister is fighting her way out of the Brexit corner, putting her hopes on forcing MPs to vote YES to the agreement secured over the weekend in Brussels by winning the hearts of the public. Her strategy consists in convincing voters that the UK is “getting behind this deal” and negotiators should now approve the accord and “get on with Brexit” to let her team focus on working on the UK’s new relation with the EU and on the exciting trade prospects Brexit may bring to an unshackled Britain. But Britons are not on board with this idea, pollster YouGov found: By more than two to one, the public oppose the agreed plan for Brexit as it stands.
Faced with fierce opposition at home, where MPs could derail the hard-won deal in a vote before Christmas, Theresa May told parliamentarians that they have a duty to deliver on what their constituents voted for in 2016. As the PM presented it, there’s no other choice anyway: rejecting the deal, May floated to lawmakers, would equate to going “back to square one.” Either way, EU leaders backed the UK PM signalling there could be no return to the drawing board: EU Commission President Jean-Claude Juncker said that Sunday’s was “the only deal possible”. An agreement that comes at a huge cost, research by the National Institute of Economic and Social Research (NIESR) has claimed: withdrawal arrangements will leave the UK £100bn a year worse off by 2030, “the equivalent of losing the economic output of Wales or the City of London”.
The battle for parliamentary approval is, thus, now on. The British Parliament is set to vote on the deal on the 11th December. Parliamentarians should read both texts together, argues Federal Trust Director Brendan Donnelly, so they can understand the full scope of the weakness and incoherence of Mrs May’s negotiating position, which makes a People’s Vote more likely.
But what happens if Commons vote down the deal, CER Director Charles Grant wonders? Three possibilities arise: it could lead to no deal – an option Work and Pensions Secretary Amber Rudd has ruled out-, the negotiation of a different deal, a general election, a second referendum – or MPs swallowing the package at the second attempt. For the time being, Labour said they would ask for an extension of Article 50, while foreign secretary Jeremy Hunt warned that the Government could fall if the Brexit deal failed.
Away from Westminster fluster, a legal action that seeks to establish whether the UK can unilaterally stop Brexit quietly made its way to the ECJ, where EU lawyers argued that cancelling Article 50 would require unanimous support from EU governments to protect the interests of the union. The tide is changing as people’s minds on Brexit, and the time may be ripe for a People’s Vote, Sky Data showed, with results finding that a majority of Brits is now against Brexit and backs a second EU referendum, which a vote for Remain would win by a 8-point margin if a referendum were held today. The strength of the British will to have a say on the final say was shown in a 700,000-strong march in London that campaigners for a second Brexit referendum are hoping to harness to lobby MPs in the run-up to a crucial Commons vote. They have identified 50 Tory MPs whose vote could be swayed on departure from the EU.
Graham Bishop marked the centenary of the end of the World War I asking Members of Parliament to “see the connection with the Sixty Years of Peace and Prosperity that have ensued. They must now represent the best interests of their constituents, look into their consciences and ensure that the people have the final say on such a profound decision”.
Should the Labour party take into account these words, MPs would back a second referendum by majority, given data released by the People’s Vote campaign that a majority of voters in all seats held by Labour support a final say on Brexit, and the motion has won the backing of former prime minister Gordon Brown.
The City of London is split on the issue: while a great number of financers backed the prime minister’s blueprint for Britain’s future relationship with the EU, half a dozen leading figures told the FT City Network that they advocate a “people’s vote” on May’s Brexit deal. The UK’s departure must give the EU a much-needed push for the capital markets union (CMU) project, Vice-President of the ECB Luis de Guindos said. Apart from further integration, the UK’s impending exit from the European Union has increased the need for banking giants in the bloc that can rival those in London and New York, according to Germany’s central bank.
Although bankers in the EU and in Britain now think financial-market chaos will be avoided, the head of the eurozone’s Single Resolution Board told the Financial Times that there wouldn’t be a‘white knight’ for banks in no-deal Brexit so they should be prepared for all scenarios. And banks have heeded regulatory warnings, moving a number of job figures but most importantly, increasing capital moves: some of the major US investment banks are planning to shift about 250 billion euros of balance-sheet assets to Frankfurt because of Brexit, as reported by Bloomberg.
Political uncertainty since the Brexit vote has reduced foreign direct investment to the UK by 19%, research by the UK in a Changing Europe found, the longest continuous decline in FDI since records began, with a £1.5 billion reduction in the value of capital investment between 2016 and 2017. And the latest EU/UK accords will make it worse, creating devastation for the City of London over time, Graham Bishop concludes in his assessment of the financial services section of the Political Declaration on the Future Relationship. Even so, BoE’s chief backed the transition deal agreed by Prime Minister Theresa May with the European Union, making the case for an even longer time to adjust.
The derivatives clearing in euros industry would have some time to avoid disruption in a no-deal Brexit: Brussels responded to financial industry calls for continued access to London’s capital markets by providing reassurance that EU groups will temporarily be able to use crucial derivatives clearing services in the UK. ESMA proposed a regulatory change to support the Brexit preparations of counterparties to uncleared OTC derivatives, and asked clients of credit rating agencies and trade repositories to prepare for a no-deal Brexit.
The battle over this trillion-worth business deteriorates further, with Deutsche Börse’s derivatives exchange Eurex extending its scheme to share profits with users to foreign exchange swaps and repo markets, in an aggressive bid to lure more of British LCH exchange market to Germany. But the excitement, somewhat spurred by a favourable political environment due to Brexit, risks ripping the lucrative market apart and triggering something worse that the 2007 financial crisis, warns Lionel Laurent of Bloomberg.
European proposals threaten to break the balance with traders abroad such as the US, duplicating regulation and giving the EU27’s markets regulator the power to inspect the activities of a US derivatives business on its home turf. The EU-US dispute could lead to fragmentation and ultimately determine the price of hedging risk, writes Patrick Jenkins, if national regulators cannot agree on a system of collaborative oversight. Germany’s deputy finance minister Jörg Kukies attempted to placate the row by saying that the EU proposal was not at odds with current regulatory arrangements between the EU Commission and the Commodity Futures Trading Commission (CFTC). ISDA produced an impact assessment for US entities registered with the CFTC in the case of a ‘hard’ Brexit for American financial dealers to address the issues at stake.
The International Swaps and Derivatives Association called on the industry to overcome challenges such as Brexit, which has the potential of throwing away some of the achievements of the global regulatory reform initiative developed over the past 10 years to make derivatives markets more robust and resilient.
Industry leaders CBI, IoD and EEF backed May’s Brexit deal, perhaps spooked by what a no-deal would look like for the UK economy as recent findings by the National Institute of Economic and Social Research showed: if Britain reverted to World Trade Organization’s most-favoured-nation status rules, gross domestic product would increase only 0.3 percent in 2019. Just in case the UK Parliament finally rejects the deal, the French government has asked its businesses to gird themselves against a cliff-edge scenario.
Rightfully so: analysis by the FT found that Britain’s solo way ahead in the global trading system will be long, arduous and to an unnerving extent dependent on the kindness of others. And ‘the others’ aren’t looking any kinder. A group of countries including the US, Brazil and China has objected to EU plans for splitting up sensitive import quotas with Britain after Brexit, while Russia was among 20 countries seeking to capitalise on Brexit after blocking an attempt by the international trade secretary, Liam Fox, to fast-track an agreement on post-Brexit UK’s terms of trade at the World Trade Organization. Moreover, US President Donald Trump dropped a rhetorical bomb saying that the deal May reached with the EU could jeopardize Britain’s ability to strike a trade pact with the US.
The Government’s trade team isn’t finding things much easier to replicate international treaties that the EU has signed with countries around the world, having rolled over only 14 of the already existent 236 trade deals. The UK was just granted “provisional” support to a WTO accord to maintain access to a $ 1.7 trillion public procurement market after British membership lapses on Brexit date.
Political
The race for the European Elections in 2019 is on, and commentators wonder what will the new Parliament’s composition be and how the departure of Britain from the European club in late March, as well as the weakening of the main parties will affect campaigning and the arithmetic of the outcome. It will surely be a crucial time for the Union, writes Pascale Joannin, while Paul N. Goldschmidt warnsthat failing to take a brave step ensures in the long run the complete capitulation of the Europhiles leading inevitably to the dismantling of the Union.
Brexit and the future it represents are forcing all Europeans to make clear what they believe in, writes the Parliament's Brexit Coordinator Guy Verhofstadt. Understanding what lies behind the 2016 Brexit vote and what will the future of pro-EU sentiment in the UK be is key to the survival of the bloc.
But nostalgic trends are taking its toll on Europhile parties, Bertelsmann Stiftungstudied. Reuters reported on polling that shows that the French far-right has overtaken Macron in EU parliament voting intention. The German chancellor Angela Merkel’s decision to
step down as CDU leader won’t help divert the nationalist drive in the EU.
This Autumn’s Economic Forecast found sustained but less dynamic growth amid high uncertainty which was reflected in a drop in the latest Economic Sentiment Indicator.
Economic
The European Commission requested Italy to revise its draft budgetary plan for 2019, because its proposed fiscal deterioration of 0.8% of GDP deviated by around 1.4% of GDP from the Commission’s recommendation of a 0.6% improvement - a deviation unprecedented in the history of the Stability and Growth Pact. The invitation was rejected and deputy Prime Minister Matteo Salvini issued a veiled threat: “If Brussels like our plan we’re happy; if not, we press forward.” This prompted a Commission call for disciplinary action, asking theCouncil of the EU to green light a process that could see the Commission impose on Rome an excessive deficit procedure (EDP).
Basic game theory teaches us that the matter will be resolved at a last-minute meeting – just like most other greater problems of the Economic and Monetary Union (EMU) in recent years, which reveals a construction flaw in the EMU architecture, authors at Verfassungsblog warn. The European Fiscal Board proposed a major overhaul of the EU fiscal framework, which it argues would result in a simpler and more transparent framework thanks to the use of a single budgetary anchor and a single observable operational target. But fixing the euro needs to go beyond reforming the EU’s economic governance, analysts at Vox EU warned.
Countries swapping their foreign currency debt back into their own currency or their domestic debt are as much at risk from credit derivatives as investment banks were 10 years ago, warned Giancarlo Sallier De La Tour. Consequences of default could be on par with 2008 financial crisis. The ECB drew attention to the diabolic loop between government debt and banking fragility.
Graham Bishop weighed in on the debate around boosting the international role of the euro. Not having a single European bill market similar to the US' Treasury bill market may be the biggest single problem for the euro in this quest, wrote Bishop – and its resolution would also help the deepening of banking union by providing a safe asset for banks. The Commission has eyed FinTech to boost euro’s role on the global stage.
Things are getting worse for EU trade: the US escalating trade war with China is likely to hit European companies, former WTO boss Pascal Lamy warned, while EU trade officials are finding it hard to get the US on board with its plan to revamp the World Trade Organization. On a positive tone, the EU and Singapore forged closer economic and political ties with three new agreements.
Banking
The European Banking Authority published the results of the 2018 EU-wide stress test, which “shows that banks' efforts to build up their capital base in the recent years have contributed to strengthening their resilience and capacity to withstand the severe shocks and material capital impacts”, EBA’s official Mario Quagliariello pointed out. One of the main features of the 2018 exercise is the implementation of the IFRS 9, recently assessed by ESMA Chair Maijoor.
The outcome of the tests, which saw British lenders among the worst performers while Italian banks passed the exam, show they should be redesigned, said the outgoing head of the European Banking Authority Andrea Enria, who is set to become the new Chair of the ECB Supervisory Board.
Efforts to improve European banks’ resilience are bearing fruit but it is of utmost importance that members adopt a fully-fledged Banking Union, EU officials warn. The Commission, the ECB, and the SRB all agreed at the latest Eurogroup meeting on 19 November that risk reduction efforts are substantial, are having an impact and pave the way for further risk sharing measures. Sabine Lautenschläger, Member of the Executive Board of the ECB, said that in general, banks now hold more and better-quality capital than in the past and significantly lower levels of NPLs on their balance sheets.
Non-performing loans are nonetheless a big burden for European banks, and a battery of measures has been put into place to address the issue: the European Council approved a proposal on capital requirements for banks' bad loans, whilethe EBA published its final guidance on management of non-performing and forborne exposures.
The benchmark regulation reform will have to wait to be fully implemented if banks have their way: a push by the industry calling for extra time to replace the euro overnight index average, EONIA, with ESTER, the new rate produced by the ECB, is making headway in Brussels, Bloomberg reported. They count on strong advocacy: ISDA is among a group of 4 trade associations requesting EU lawmakers to extend the transition period of the Benchmark Regulation for critical and non-critical benchmarks. The FSB is monitoring the development of overnight nearly risk-free rates (RFRs), and markets based on these rates, and further reforms to interbank offered rates (IBORs).
Widening inequalities in advanced economies has become an increasing source of concern for global policymakers: the FSB members warned the G20 that, while global growth remained solid, it has become more uneven across economies, and some downside risks have begun to materialise. Agustín Carstens, General Manager of the BIS, discussed how regulation should respond to the old sources of risks that triggered the financial crisis focusing on adequate implementation of the new international standards. In this sense, the Basel Committee called for further progress in the implementation of the Basel III package.
Securities
The Financial Stability Board published its 2018 Resolution Report and launched a consultation on financial resources to support central counterparty resolution. Along with the Basel Committee, IOSCO and the CPMI, the FSB published a report on effects of reforms on incentives to centrally clear over-the-counter derivatives.
Asset Management
The ESAs consulted on its proposed changes to the key information document for PRIIPs, whereas ESMA launched a consultation on guidelines for European money market funds’ disclosure, planned for 2020, and two major pan-European advocacy organisations urged the European Commission to exempt all pension funds from having to “unnecessarily” pay value-added tax on contracted management services.
The rapid growth of the industry (more than $30tn assets in a decade to account for $80tn in 2017) ismaking global lawmakers grind their teeth over the major financial mayhem the asset management market could cause in a new recession. Bank of England Governor Mark Carney sounded the alarm about the “major new vulnerability” that open-ended funds that promise investors instant liquidity despite holding potentially illiquid assets represent across the G20.
Insurance
The IASB proposed a one-year deferral of the effective date for IFRS 17, the new insurance contracts standard, to 2022. The delay will give insurers enough time to prepare, ensuring there is no impairment of information quality, according to S&P Global Ratings. The standard has the potential to strengthen financial stabilitythrough the expectedly increased transparency and comparability of insurers' financial statements, the European Insurance and Occupational Pensions Authority found.
The IAIS launched a public consultation on a draft Holistic Framework for Systemic Risk in the Insurance Sector, while EIOPA askedstakeholders for feedback on its review of illiquid liabilities and analysis of potential implications.
The EIOPA has made an important contribution to a common supervisory culture and financial stability in the insurance sector, but significant challengesstill need to be addressed, according to a new report from the ECA. More work is also needed for the revised global Insurance Capital Standard (ICS) to properly reflect insurers’ business models, and for it to correctly identify and measure the risks that insurers face, Insurance Europe stated.
The Bank of England’sPRA issued a Policy Statement that provides feedback to responses to its consultation on implementing the extension of the Senior Managers and Certification Regime to insurers.
Corporate Governance/Accounting
By 2023, 65% of governments will report on an accrual basis, according to a report by IFAC and CIPFA drawn from the International Public Sector Financial Accountability Index.
ACCA´s research reveals 48% of public believe auditors ‘could prevent company failures’, and professional scepticism lies at the heart of a quality audit - theIAASB updated on its efforts toappropriately reflect professional scepticism in its standards.
Anti-Money Laundering
Joshua Kirschenbaum and Nicolas Véron detailed their plan for a new European anti-money laundering authority that would work on the basis of deep relationships with national authorities, and their proposals were listened to in Brussels, but regulators stopped halfway through: the ESAs launched a consultation on guidelines that propose the creation of Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) colleges of supervisors and set out the rules governing their establishment and operation.