It’s the biggest event of the year for the City of London, and firms are taking no chances before the Brexit deadline as they scrap holidays, ensure access to ready cash and prepare to execute contingency planning.
For financial institutions, the stakes are high: they don’t want to be on the wrong side of a 10% move in sterling or UK stocks. State Street Corp and Mizuho Bank Ltd have instructed sales and trading staff to take no leave until November, while Vanguard Group Inc said it had devoted “significant resources” over the past three years to manage the impact.
Next week’s European Union summit may determine if another extension is granted or if talks drag into the night of Halloween. Market volatility is both an opportunity and hazard for traders, but what makes Brexit an extreme risk is the fluidity of the deadline – twice postponed already to October 31 – the multiple possible scenarios and the potential size of market swings.
“This rolling period of uncertainty does make it harder to plan around,” said James Wood-Collins, the chief executive officer at specialist currency manager Record Plc. “You can imagine a situation where its 9, 10 o’clock on the 31st and the market is on tenterhooks to see whether or not an extension will be granted, the news comes that it’s not going to be granted and the UK is leaving in 30 minutes.”
That worst-case scenario for markets would leave traders exposed to the so-called witching hour between the end of the New York day and the Asian open, when liquidity is low and the risk of flash moves is exacerbated.
HSBC Holdings Plc will have full staffing, with plenty of access to liquid funds to be able to provide quotes and large trades for clients if needed, according to a person familiar with the plans, who asked not to be identified as they’re not authorised to speak about it. The bank plans to use its French operations as the main entity for euro-area clients after Brexit, and is continuing to move customers over.
“We take the same approach we’ve taken before, as painful as it is to anticipate and have nothing,” said Alan Schwarz, New Jersey based-chief executive officer at FXSpotStream LLC, a trading venue launched by banks. “We’re going to just put more people in London, more people here, more people in Tokyo.”
Many investors see a postponement of Brexit and a potential UK election as the most likely scenario, after talks between Prime Minister Boris Johnson’s government and Brussels ran out of steam this week. That is reflected in options bets on pound volatility, which are higher over two months than for two weeks or one month. Johnson was set to meet his Irish counterpart Leo Varadkar yesterday for a last-ditch effort to find a compromise.
The EU summit on October 17-18 could be more of a threat than the Brexit deadline, according to Timothy Graf, head of macro strategy at State Street. Johnson has also scheduled an emergency sitting of the British Parliament for the following day. While the EU gathering is a decisive moment for what Johnson does next, it has not been the focus of banks’ planning, unlike October 31.
“It will all be over but the shouting by the 28th, I would guess,” said Graf.
Unlike an election or even the 2016 Brexit referendum, there is the potential for news to come at unexpected times at any point between now and the deadline.
Record’s Wood-Collins is dealing with this by increasing hedging levels for non-UK clients who hold sterling assets and running through worst-case scenarios with them to ensure they have sufficient liquidity. The pound could drop to $1.11, the lowest since 1985, on a no-deal Brexit, according to a Bloomberg survey of strategists.
The Bank of England has warned of significant market volatility and “material risks” of economic disruption in the event of no deal by the end of the month. Governor Mark Carney has said it would be “highly unlikely” to intervene to support the currency.
For investors who have the choice, it’s best just to avoid the UK altogether, according to Legal and General Investment Management. The firm’s Chief Investment Officer Sonja Laud said its Dublin office is planning to take on all its European business.
“For every fund that does not have to have UK exposure at this point you would say it’s not worth it,” said Laud.
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