Never waste a good crisis

EU and UK are still in negotiation mode. In absence of an extension of the transition period, a no-deal Brexit has once again become a plausible scenario. The advice “hope for the best and prepare for the worst” is as valid as ever in this saga.

We advise financial institution to not plan based on equivalence. Even in the best of cases, equivalence doesn’t cover all relevant areas. What’s more, neither the very rational of the Brexit – taking back control – nor the way negotiations are going, point to equivalence as a solution.

Market participants acted accordingly. The loss of passporting rights will lead to a shift of roughly 50 percent of EU business on UK based bank balance sheets to the continent. We have seen bookings move into Frankfurt of about €300 billion so far. We expect another €100 billion before the end of the year and we know of another €400 billion ready to move.

Will all that lead to more inefficiencies? Not necessarily. Fragmentation may, but does not necessarily, lead to higher costs. Notto forget that costs occur not only on banks profit and loss accounts, but eventually also in state-budgets. Given the impact on financial stability, standing on your own two feet is better than standing on one, especially if that one is beyond your control.

It was a key project of the G20 under the stewardship of Japan fighting global fragmentation of financial markets and rightly so. At the very same time Japan continued on its endeavour in bringing the Yen clearing back to Tokyo, at least to a sufficient degree.

Take Eurex as an example: We are nearing 20 percent of Euro denominated interest rates swaps, were clearing moved from London to Frankfurt, and growing. This was achieved with costs and spreads on par for market participants. Social risks could be reduced and at the same time costs for market participants been avoided. If it sounds like the holy grail, it probably is. Let’s remember the scaremongering numbers of up to €100 billion additional costs European banks would have to bear once clearing would have to move. So clearly there can be a good fragmentation, leading to a healthy competition and more financial stability – at no additional costs for the industry. Fragmentation can, but doesn’t have to be bad and may even be good.

The train of shifting business is in motion. In a world ever more polarized and global powers increasingly self serving, Europe can ill afford to loose control of it’s financial ecosystem, given the geopolitically relevance of the industry. Naturally the UK will always be invited to be the EU’s preferred partner.

The corona virus created a push towards digitalization and solidarity in Europe, at a spead, that was surprising even for optimists.

The corona virus created a push towards digitalization and solidarity in Europe, at a spead, that was surprising even for optimists. As a result, we need to ask ourselves: Do we witness the early days of a new European safe asset class?

And if so, could it accelerate the creation of the common EU capital market. Europe’s ability to move under stress has repeatedly been underestimated. I’m bullish on Europe living up to its challenges, not wasting this crisis.

 

Source: Hubertus Väth, Managing Director of Frankfurt Main Finance in Views – The EUROFI Magazine (Berlin, September 2020)

Image: Pete Linforth/Pixabay

AFME calls for further progress on the future EU-UK relationship for financial services

With less than six months remaining before the end of the transition period, the Association for Financial Markets in Europe (AFME) urges the EU and UK to make progress on the negotiations and put in place equivalence decisions and  the necessary arrangements to ensure a stable long-term relationship for financial services and minimise potential disruption.

In a paper setting out priorities for the future EU-UK relationship, AFME highlights that continuing uncertainty on Brexit, combined with the adverse macroeconomic situation arising from COVID-19, has the potential to aggravate existing risks at the end of the transition period and significantly increase disruption to clients and markets.

AFME is calling on the EU and UK to:

  • ensure that equivalence determinations are in place well in advance of the end of the transition period;
  • establish arrangements for close supervisory cooperation to ensure effective and efficient oversight of firms and cross-border activities; and
  • establish a formalised framework for regulatory cooperation to build trust and ensure as much transparency and certainty as possible over the processes for the assessment and withdrawal of equivalence.

Find the full paper at: AFME paper: The future EU-UK relationship


The Association for Financial Markets in Europe (AFME) is the voice of all Europe’s wholesale financial markets, providing expertise across a broad range of regulatory and capital markets issues.

 

Photo: TheDigitalArtist/Pixabay

Asahi Shimbun interviewed Hubertus Väth

Kazuo Teranishi, correspondent for Asahi Shimbun, one of the oldest and largest national daily newspaper in Japan, interviewed Hubertus Väth during his visit in Tokyo in March 2020, which took part in the FinCity Global Forum (hosted by FinCity.Tokyo).

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Germany after Brexit: Now there is a need for doers – Guest contribution by Hubertus Väth in “die bank”

The countdown was projected on to the side of Prime Minister Boris Johnson’s office and residence at 10 Downing Street until Brexit’s completion on 31 January 2020, midnight Brussels time. Negotiations on future relations are underway. However, regulatory questions for the financial sector remain largely unresolved. London will – also in the well-understood interests of the EU – remain the leading financial centre in Europe for a long time to come. This does not mean, however, that the UK’s withdrawal will be without consequences. The cake will be newly cut, and Germany should use this opportunity to establish Frankfurt as the leading financial centre in the EU, all the while striving for constructive cooperation with London and Paris.

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Statement on the agreement between the EU and Great Britain

The European Union and the United Kingdom have agreed on a Brexit extension until January 31st, 2020.

Hubertus Väth, Managing Director of the Financial Centre initiative Frankfurt Main Finance, says:

“Frankfurt Main Finance welcomes the European Union’s decision to agree to an extension of the United Kingdom’s withdrawal from the EU. The chances of an unregulated Brexit to occur are now considerably reduced after the approval of the current agreement. We understand this to be a victory of reason.”

Webniar Moving to Frankfurt

Moving to Frankfurt – What Germany’s financial capital has to offer

If you or your company are thinking about moving to Frankfurt, you surely have a number of questions. Some, of course, concern legal questions, but some others will be of a more practical nature. Practitioners from Dentons in Frankfurt and Hubertus Väth, Managing Director of Frankfurt Main Finance, invite you for a webinar to answer some of your questions. You can register for the Moving to Frankfurt Webinar here.

The speakers of the Moving to Frankfurt Webinar will be:

  • Hubertus Väth, Managing Director, Frankfurt Main Finance
  • Amy Kläsener, Partner, Dentons
  • Bernhard Gemmel, Partner, Dentons
  • Frank Lenzen, Partner, Dentons (Frankfurt)
  • Michael Huertas, Partner, Dentons

Join the event for a fast-paced, one-hour webinar that will bust open some of the myths typically related to living in Frankfurt and doing business within and outside of Germany.

Topics to be addressed include:

  • What’s the lead time to setting up business and residency in Germany?
  • What are the top tips when negotiating a business or residential rental contract?
  • Are German/EU labor market checks required for certain employees and positions?
  • If employed in Germany, how mobile am I across the EU?
  • Why is German employment law geared towards going to court following dismissals?
  • How different is the German and EU financial services regulatory environment, and will I have to comply with double rules?

Date: Tuesday, November 06, 2018

Time: 04:00 PM Central European Time

Duration: 1 hour

Find more information and registration here.

Costs of Brexit for EU27 exporters is around £31billion and for UK exporters is around £27billion. Source: Oliver Wyman

New Report Estimates Brexit ‘Red Tape’ Will Cost EU27 and UK Exporters £58 Billion a Year

  • The annual ‘red tape’, or tariff and non-tariff, costs of Brexit for EU27 exporters is  around £31billion and for UK exporters is around £27billion even after initial steps to mitigate costs have been taken. This is proportionately 4 times larger for the UK as a percentage of Gross Value Added (GVA ).
  • 70 percent of the aggregate impact falls in just five sectors in both the EU27 and UK.
  • Disproportional impacts in specific regions such as Bavaria in Germany and London in the UK.
  • A future customs arrangement equivalent to The Customs Union reduces the EU27 impact to around £14billon and the UK impact to around £17billon. Mitigating the costs of Brexit are non-trivial and impacted firms need to be taking steps now. Small firms will be least able to mitigate these costs and in turn pose risks to their supply chain.

BRUSSELS and LONDON, 12 March 2018 – In a unique assessment of the business costs of Brexit, Oliver Wyman and Clifford Chance have partnered to calculate the impact of tariffs and non-tariff barriers on companies if the EU27 and UK reverted to a World Trade Organisation (WTO) trading relationship with each other.

The ‘red-tape’ cost of Brexit estimates that the direct costs will total around £31billon for EU exporters and around £27billon for UK exporters, with non-tariff barriers accounting for more of the effect than tariffs. The report focusses only on the direct impacts of the UK’s exit from the EU which are of immediate importance to companies for Brexit planning. It does not model additional impacts such as migration, pricing changes or third country Free Trade Agreements, which are likely to increase the overall impact.

In the EU27 the hardest hit sector will be automotive, where the direct impact will be around 2 percent of current GVA.  Country level differences will vary considerably, with Ireland’s agricultural sector’s exposure to UK consumers, for example, a particular pinch point. In Germany, four of the sixteen states – Bavaria, North Rhine-Westphalia, Baden –Wuerttemberg, and Lower Saxony – will shoulder around 70 percent of the country’s direct impacts as a result of exports to the UK that arise from their leading global positions in automotive and manufacturing.

In the UK the Financial Services sector will take by far the biggest hit, incurring around a third of the extra ‘red-tape’ costs. However, there are very significant impacts in other sectors where firms are highly integrated into European supply chains – for example in the automotive, aerospace, chemicals and metals and mining sectors.

Kumar Iyer, Partner, Oliver Wyman, says: “There will be both winners and losers from Brexit. In order to navigate the uncertainty companies should be thinking about impacts under different scenarios both operationally and strategically. We see the best prepared firms taking hedges now based on the direct impacts on themselves, their supply chains, customers and competitors. Unfortunately we see that small firms are least able to take these steps at present.”

The impact assessment also reveals that the ability to mitigate the impacts of post-Brexit trade barriers will vary by sector and company size. Before designing their response, firms need to think through the impact on different levels: operations, supply chains, customers and competitors. Small firms will find this particularly challenging especially where they have no non-EU trade experience and may be rendered uncompetitive as they seek to make the changes needed. Automotive and aerospace industries will be able to localise supply chains and take advantage of domestic suppliers in some areas but with the loss of “passporting” financial services will require relevant front and back-office staff to relocate to the EU.  However, even within each industry individual impacts and the appropriate response are highly variable. The differences will depend on things like the mix of goods and services the business sells, where it is based, where its customers are, and how complex its supply chain is.

Jessica Gladstone, Partner, Clifford Chance, says: “Failing to prepare is preparing to fail. Given the difficulty of knowing exactly what turbulence lies ahead many businesses are putting Brexit in the ‘too hard’ box. However, exporters that understand exactly what Brexit’s risks and rewards could be for them will be able to implement the right plans at the right time to ensure that they are one of the winners rather than one of the losers.”

Access the full report: The Red-Tape cost of Brexit

Source: Oliver Wyman

AFME & Clifford Chance publish FAQs to assist bank clients address contractual questions

AFME, together with Clifford Chance, has today published guidance to assist bank clients in understanding how their cross-border relationships may be impacted by banks’ plans to adapt to Brexit.

The FAQs explain the potential significant impact on contractual relationships for financial services, providing answers to a number of “Frequently Asked Questions” which highlight potential operational and documentation impacts. As banks begin implementing their Brexit contingency plans, clients are likely to see impacts in respect of existing cross-border contracts and will be required to put in place arrangements for new business following Brexit.

The FAQs address questions such as which clients may be in scope, which contracts may be affected, how they may be impacted and consequential operational impacts that need to be considered.

Simon Lewis, Chief Executive of AFME said: “With the Brexit political process still ongoing, our FAQs document highlights the need for clients to take action now by reviewing documentation and operations to understand how they might be impacted, including whether operations may need to change. This is to ensure that clients have sufficient lead time to address documentation, technical and other issues for minimal business disruption. In this respect, AFME continues to call for clarity that clients will be able to rely on services under existing contracts post-Brexit.”

Monica Sah, Partner at Clifford Chance, said: “Six months ago nobody was talking about repapering. Now people realise that moving contracts from one jurisdiction to another is likely to be a significant undertaking as banks adapt to Brexit. These FAQs attempt to simplify a hugely complex process and help clients understand how their day to day contractual activities will be impacted by their dealers’ implementation of their own Brexit strategies. Clients need to work with their dealers to ensure a smooth transition and a continued seamless service.”

The FAQs primarily focus on questions relevant to EU27 clients of UK-based banks in relation to sales and trading in wholesale markets and related credit given for settlement purposes. The FAQs also highlight questions for UK-based clients of EU27-based banks, and primary market and financial market infrastructure impacts.

The FAQs are available in EnglishFrenchGermanItalian and Spanish.

Financial Centre Frankfurt

Spahn calls for more élan for Frankfurt

Twenty-four banks are already planning to expand their Frankfurt business ahead of the upcoming Brexit – but the actors cannot rest on their laurels, reminds CDU executive committee member Jens Spahn. Especially opposite Paris, Hesse and Berlin would have to exert themselves. There is still much to be done on the Main.

The Parliamentary State Secretary of the Federal Minister for Special Tasks, Jens Spahn, emphasized on Wednesday at an event of the Hessian CDU how important the further development of the Financial Centre Frankfurt is for the federal government in Berlin. Politicians must work even harder to maintain the metropolis’s leading position, he said. Spahn referred to Germany’s failed attempt to bring EU banking supervisor, EBA, from London to Frankfurt. Instead, Paris won the bid in November. In view of Brexit, and a possible resulting shift in euro clearing, Frankfurt must be more successful than EBA, said the 37-year-old, who was still working as State Secretary in the Federal Ministry of Finance until October.

In order to make the Financial Centre Frankfurt more attractive, some things must be done on site, he said, recalling housing construction and labor law adjustments, especially for investment bankers. In contrast to other EU member states, the Federal Government is still keen to maintain a close relationship with the British in the future. However, it is not yet clear which access to the financial market the British choose: London, like Singapore, could become a financial centre whose looser regulation attracts business or anchor itself to the rules of the EU area.

Money for a light bulb

The phase of confrontation with the digitalization of the financial sector is over: Fintechs pivoted to cooperation with established actors – for which Spahn himself launched a number of initiatives and contributed to bringing the banks into dialogue with Fintechs. His motto: “Talking to each other is half the battle.” Speaking several times about the subject of blockchain, Spahn pointed out that the technology, which makes transactions comprehensible and without a central authority, allows him to see far-reaching changes possible. “Blockchain can make the business model of intermediaries completely superfluous.” Thanks to digital identity management, an investor can then also transfer money “to a light bulb in Malaysia,” said Spahn with a smile. He sees a need for action in the establishment of blockchain companies in Germany. Although a large number of software developers are at home in Berlin, the companies themselves (usually via foundation constructions) are at home in Switzerland – there is the so-called “Cryptovalley” in Zug.

After the Financial Centre event, Spahn made a stopover at the first Portfolio Day of the Deutsche Bundesbank. In his opinion, the German government is still at the beginning of sustainable finance. “Everything is still very timid in comparison to the demands and wishes,” he said. “With all our strength towards green finance is certainly not our motto.” In the recent exploratory coalition talks, Green Finance had been an issue, but in the economic not in the finance department. “However, it was just about a general commitment to it.”

Spahn pointed out three areas in which the federal government is already strengthening itself for sustainable investments: the fund for financing nuclear waste management, into which the nuclear power operators have paid around EUR 24 billion, is to be managed according to ESG criteria (environmental, social, governance). Secondly, sustainability is an issue for KfW, which is owned by the Federal Government and the Federal States: “In 2016,44% of KfW’s funding volume went to environmental and climate protection measures.” In addition, KfW is Germany’s largest and the world’s second largest issuer of green bonds and an important investor. Thirdly, during its G20 presidency, which just ended, Germany fought for a stronger focus on the issue of sustainable investment.

According to Spahn, public sponsors often have different ideas about what sustainability means. “There is certainly a consensus that there should be no investment in companies that rely on child labour. It’s more difficult when it comes to climate issues like nuclear power or coal.” He himself considers nuclear power to be an important bridge technology. “Should the question of how the state invests really be politicized?” He believes that market regulation is more important: the state must ensure transparency, for example. “That would be comparable to the electricity sector: only green electricity can call itself what green electricity is.”

Spahn also made it clear that for him, sustainable investment does not only consist of green capital investment and ESG criteria. This also included the security of the investment and financial market stability. “George W. Bush’s measures to promote home ownership were intended as a social measure, but ultimately contributed to the financial crisis.” Yield is also an important aspect. Spahn has long advocated a higher proportion of equities in federal funds such as the nursing care provision fund.

Source: Börsen-Zeitung, Issue 235 from 07.12.2017.

Deutsches Aktieninstitut presents its second Brexit position paper and claims: Transitional arrangements now!

The Deutsches Aktieninstitut (DAI) presents its second position paper. The paper on the exit negotiations between the European Union and the United Kingdom complements the first position paper from February 2017 and covers further relevant topics, e.g. clearing, benchmark and rating. In the light of proceeding negotiations, the position paper claims to find transitional arrangements that prevent Europe from a Cliff Edge Scenario.

Under the slogan “Exit negotiations between the European Union and the United Kingdom: Minimise Brexit risks and strengthen the European capital market”, the analyses of financial and capital market legislation and concrete examples from practice, illustrate which topics deserve particular attention due to their significance for business and society in connection with the Brexit negotiations.

No deal is the worst deal for all parties affected

“The United Kingdom’s departure from the European Union will have considerable consequences for the European economy and society”, Dr. Christine Bortenschläger, Chief Executive of DAI mentions in the paper, “It is not yet possible to predict how those will look like in detail since the outcome of the ongoing negotiations between the United Kingdom and the European Union is still completely open. This means that companies are losing valuable time they need to adjust to the new situation.”

Risk and consequences of a hard Brexit can be reduced with transitional arrangements

The third country regimes in financial -and capital markets law won’t serve as a sufficient basis to regulate the relations between the 27 EU-states and the United Kingdom, as the second position paper shows. Therefore, the European Union needs a new and broad trading agreement that complements first transitional arrangements. “Transitional arrangements are of decisive importance to buy more negotiating time, enable businesses to prepare for the new situation, and avert a no-deal scenario”, is one of the first position paper sentences.