How it has started and where we might be going Institute of - - PowerPoint PPT Presentation

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‘Brexit’ – How it has started and where we might be going

Institute of Chartered Secretaries and Administrators – CPD Series 02 March 2017

Cormac Little and Eoin Caulfield, William Fry Brendan Donovan, AIB Bank

Foreign Exchange Risk and Solutions

ICSA Ireland Region Presentation Thursday 2nd March 2017 Brendan Donovan Head of Commercial & Business Treasury AIB Customer Treasury Services

Overview of Euro-Sterling movement since January 2016

Pre Referendum Result (76p) 20% Sterling Depreciation (91p) US Election (86p)

Overview of Euro-Sterling movement over past decade

2008 (98p) 2016 (91p) 2007 (65p) 2015 (70p)

Overview of Euro-Dollar movement since January 2016

Pre Referendum Result (76p) 20% Sterling Depreciation (91p) US Election (86p)

Overview of Euro-Dollar movement over past decade

Pre Referendum Result (76p) 20% Sterling Depreciation (91p) US Election (86p)

FDI / City of London

UK biggest recipient of FDI in

• EU. London centre of Europe

financial services industry

Trade Deal Options

UK puts sovereignty ahead of access to single market – thus Norway and Swiss type trade deals ruled out by UK

Free Trade Agreement

UK likely to seek its own FTA with EU, but like Canada, it will take years to negotiate, may still not include services, still have to abide by EU rules

Trade is the key consideration in Brexit

Very close links between UK & rest of EU, which takes 45% of UK exports

UK Dependence on EU Hard Brexit Likely

Hard Brexit would see UK leaving the EU Customs Union and Single Market, while current EU trade deals with other countries would no longer include UK

Trade with UK equates to 35%

• f Irish GDP. Thus, it is a key

trading partner UK takes 43% of Irish indigenous firm exports, so very important trading partner Expected negative impact of Brexit on UK economy will have knock-on effect in Ireland Sterling has fallen sharply on Brexit concerns, which will hit exports to UK

• Sterling has fallen sharply on Brexit

concerns, which hits exports to UK

• Also impacts Irish firms competing

with UK exports to Ireland and third country markets

• Many Irish exporters are small firms

with no Treasury function so don’t hedge currency exposure

• Cross border trade picks up as

shoppers head North following sterling's big fall

• Sterling weakness also has a

significant impact on cross-border businesses like hotels, restaurants

• Brexit has serious implications given

close economic/trade links with UK

• Trade with UK equates to 35% of

Irish GDP. Thus, it is a key trading partner

• UK takes over 40% of Irish

indigenous firm exports, so very important trading partner

• Expected negative impact of Brexit
• n UK economy will have knock-on

effect on Irish exports to there

• Agri, tourism, energy, retailing,

financial sector most likely to be impacted by Brexit

• Higher trading costs from more

administration, differing trade rules and regulations, compliance costs, possible customs duties and tariffs

• Brexit could impact considerable

cross-country investment between UK and Ireland.

• Border with Northern Ireland will

become an external EU land border, with possible Customs checks. Look to preserve Common Travel Area

• Ireland will lose key ally within EU

when UK leaves as share similar views

• n taxation, regulation, state

involvement in economy etc.

Brexit is a major headache for Ireland

Why?

If a business generates revenues or cost in different currencies, it is exposed to Foreign Exchange (FX) risk whereby currency movements can affect the margin the business earns. To mitigate this many companies choose to hedge their FX exposures. FX hedging will:

• Protect against adverse movements in FX rates.
• Enable accurate forecasting and budgeting.
• Provide a prudent approach where cash flows or margins are tight.

How long and for how much?

• What are the business/payment cycles?
• What are the business margins ?
• What line of sight exists for upcoming exposures?
• How much rate certainty does the business require?
• What is the market view and what is the business’s appetite for risk?
• What is the business’s budget rate – how does this compare with prevailing market rates and trends?

Why Hedge? How long? How Much?

Traditional methods of hedging FX exposures

Natural hedging

A natural hedge is the reduction in risk that can arise from a company’s normal operating

• procedures. A company with significant sales in one country holds a natural hedge on its currency

risk if it also generates expenses in that currency. Having a currency account is imperative. For example, a company selling product into the UK is (partially) naturally hedged against the moves in EUR/GBP, if it can transfer some of their costs into GBP. For example:

• Switch some of your product input costs to GBP
• Ask for your distribution company to quote you a fixed GBP price*

*Note, this doesn’t require moving to a UK supplier. As their costs will largely be in sterling, you may assist them in gaining natural hedging also.

Traditional methods for hedging FX exposures

Spot Trades

Spot Trade is an agreement to exchange currencies at a rate agreed today (the prevailing market rate) as your incoming/outgoing payments fall due.

Main Features

Customers who trade on the spot market are exposed to fluctuating currency markets between the invoice date and the actual payment date, therefore:

• Underlying business margins are unprotected
• Spot rates provide no cash flow certainty
• Free to benefit from any subsequent favourable exchange rate moves.
• No obligation to deal should your circumstances changes between the invoice date

and the actual payment date

• No credit limit required

Traditional methods of hedging FX exposures

Forward Contracts

A forward contract is an agreement to exchange currencies on an agreed date in the future (or during an agreed period) at a pre-agreed fixed exchange rate.

Main Features

• Cash flow certainty and underlying business margins protected against adverse exchange

rate moves.

• Unable to benefit from any improvement in FX rates, as you have committed to dealing at

the agreed rate.

• You are obligated to deal as per the agreed contract. If your circumstances change and you

need to reverse out of that transaction you may be liable for a breakage cost.

• Forward limit is required.

Traditional methods of hedging FX exposures

Vanilla FX Option

A Vanilla FX Option is like an insurance policy. In return for paying a premium, you buy the right, but not the

• bligation, to buy or sell one FX currency against another on an agreed future date, at an agreed rate (the strike

rate). You decide the strike rate. There is no obligation on you to exercise your option. Therefore, if the spot rate on expiry is better than the strike rate, you can deal at the more preferable spot rate. This gives you unlimited potential to benefit from any favourable FX moves with 100% protection at the agreed strike rate.

Example – Current Spot rate is 0.8450. You want the right but without the obligation to sell GBP £100,000 at

worse case 0.8700 with a maturity date in 3 months time. In exchange you pay a premium of €2,000. There are two possible outcomes on maturity: 1) The spot rate is lower than 0.8700, so you sell your GBP at the lower prevailing spot rate. 2) The spot rate is higher than 0.8700, so you exercise your right to sell GBP at 0.8700.

Note: The premium is determined by the difference between the prevailing spot rate and the strike rate, and the time period

• hedged. The premium is non refundable, however it can carry a resale value.

Spot Rate Forward Contracts Vanilla FX Option Exchange rate protection? No Yes Yes Certainty of Rate? No Yes Known Worst Case Rate Able to participate in beneficial rate moves? Yes No Yes Upfront Premium Payable? No No Yes Potential Break Cost? No Yes No

Which Product is right for my company?

In most cases, some combination of the above is the most appropriate way to tailor a solution specific to your hedging requirements rather than choosing a single product.

Managing FX Volatility

FX Market Orders

FX Market Orders are used by businesses aiming to achieve a specific exchange rate in order to protect or maximize profitability on trade transactions. FX Market Orders come in 2 forms: Take Profit Order - You give an instruction to the bank to exchange a fixed amount of one currency for another currency should the market reach a specified exchange rate that is more favourable to you than the current market rate. Stop Loss Order - You give an instruction to the bank to exchange a fixed amount of one currency for another currency should the market reach a specified exchange rate that is less favourable to you than the current market rate. This limits the degree to which you are impacted in the event of an adverse move in the exchange rate. Note - Once the FX market order is filled, a spot deal or forward contract can be processed.

What next for Irish businesses?

• Identify and understand your treasury requirements
• Formulate a treasury policy which is suitable for your business
• Set periodic currency budget levels
• Develop an awareness of the markets and the risk mitigants
• Be disciplined – most Irish companies use a combination of spot and forward FX
• Engage with your bank/treasury provider

How can AIB Treasury help your business?

• Assist you in formulating a treasury policy
• Proactive calls/emails/texts on foreign exchange rate movements
• Comprehensive data available from our economic unit
• Competitive pricing and effective deal execution
• Meet our key customers regularly
• Provide informed advice

fxcentre.aib.ie @TreasuryAIB

ANY QUESTIONS ?

Thank you for listening

williamfry.com

From revolution to evolution

Cormac Little Partner, Head of EU/Competition William Fry

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• 23 June 2016 – UK Referendum
• Article 50 of the Treaty on European Union
• Principle of Parliamentary Sovereignty – Miller & Dos Santos v Secretary of State for

Exiting the EU

• The EU’s Task Force led by former Commissioner Michel Barnier
• PM May’s priorities – the Lancaster House speech
• Once Article 50 is triggered, what is likely to happen next?

Table of Contents – From Revolution to Evolution

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• 23 June ‘Revolution’ – UK voted to leave the EU by a

majority of 1.25 million

• 51.9% voted to leave – Turnout was 72.2%
• Not legally binding
• First EU Member State to leave?

Referendum Result and Article 50

• When Denmark joined the then EEC in 1973, Greenland had voted overwhelmingly to

stay out, things changed when home rule was granted in 1979

• Referendum in 1982 – Greenland left in 1985 – after a long wrangle regarding fishing

rights

• Back to 2017, the first step is for the UK to notify the European Council of its intention

to withdraw under Article 50(2)

• Last October, UK PM Theresa May promised this will happen by the end of this month

Source: Irish Times

24

• Challenge to whether the UK Government/the Crown has the unilateral

power to trigger the formal process for withdrawing from the EU

• UK Constitutional Law – Sovereignty of Parliament
• Crown has the ‘royal prerogative’ over the making of international treaties
• Categories of ‘EU rights’ that would be lost if UK leaves
• Only Parliament may repeal primary legislation – High Court decision on 3 November 2016
• Secretary of State appealed to the UK Supreme Court
• Article 50(2) notice is both irreversible and unconditional
• Appeal was based on the fact that the relevant UK legislation was silent on withdrawal
• Court held on 24 January that a Crown prerogative can’t be read into same

Miller & Dos Santos v Secretary of State for Exiting the EU

25

• Article 50(2) states that the EU will negotiate a withdrawal agreement with the UK
• The Commission has established a task force to prepare and conduct the negotiations
• This team is led by former Commissioner Michel Barnier
• No.2 in the task force is a former senior official or fonctionnaire in the Commission’s trade

department, DG Trade, Sabine Weyand

• The Commission will lead the negotiations but the ultimate decision lies with the Council of

Ministers (i.e. the representatives of the 27 Member States)

• UK team lead by Secretary of State of Exiting the EU, David Davis MP
• The European Parliament must give its consent to any withdrawal deal
• Negotiations are likely to focus on cost of withdrawal – not on any free trade agreement
• It may cost the UK between EUR 57 billion to EUR 70 billion to leave the EU

The EU/UK Withdrawal Negotiations

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• Set out the UK’s priorities – a hard ‘Brexit’
• Leaving the single market but will push for ‘greatest

possible access’

• Leaving the customs union but have a customs

agreement with the EU

• Restrictions to EU migration
• Rights of EU nationals in Britain, British nationals in the

EU

• Final deal put to a vote of Westminster
• Maintain common travel area with Ireland
• No jurisdiction of the Court of Justice of the EU
• Appropriate contribution to EU budget

PM May’s Lancaster House Speech on 17 January 2017

Source: BBC

27

Evolution - What happens next?

• A two-year deadline/March 2019 unless this is

extended by a unanimous decision of the European Council

• In effect, much less than two full years for

negotiation as the ‘deal’ must be approved by the Council of Ministers, the European Parliament and Westminster

• Transitional arrangements? Free trade deal?
• UK plans to submit withdrawal notice this month
• European Council must set guidelines for the EU side – possibly by 8-9 April 2017
• Possible EU ‘red-line’ items - Unity is strength; third countries can’t have the same right and

benefits; and the four freedoms are indivisible.

• Negotiations then begin between the EU team led by former Commissioner Barnier and the

UK delegation led by Secretary of State Davis

Source: ben-jennings.com

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Brexit – issues for ICSA members

Eoin Caulfield Partner, William Fry

29

• Effect on company structures
• Issues for public companies
• Operational effects:

–Tax and treasury –Employment –Data protection, intellectual property –Litigation and insolvency etc.

• Financial services

–Passporting and equivalence

• Brexit restructuring

Overview – Brexit

Source: Daily Telegraph

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• Brexit is not Grexit – e.g. not in Eurozone
• Great Repeal Bill

–Directives – more than 6,000 –Regulations – more than 140,000 –Case law – more than 18,000 European judgments

• Day 1 – full alignment, issue is what happens after that…
• Areas affected – it’s political

–where UK most wants self determination

• Court of Justice of the EU
• Immigration / employment law (Workers Rights Directive)
• Tax (e.g. corporate tax rate – the “CCCTB” project)

–where maximum harmonisation – e.g. financial services

Business as usual?

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• Companies Act 2014 / UK Companies Act 2006

–Branch EEA / Branch non-EEA – effectively the same –EEA director requirement

• Loss of cross-border corporate approaches

–Cross-border merger regime –Societas Europaea (SE) companies – 53 in UK –Insolvency Regulation

• Other forms – e.g. fund structures

–European Economic Interest Groupings –UCITS, Common Contractual Funds

Implications for UK companies

Source: Daily Telegraph

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• Capital Markets Union (and earlier Financial Services Action Plan)

–European Supervisory Authorities (ESMA, EBA, EIOPA) – e.g. rating agencies, banks

• Core elements

–Prospectus Directive – retail offers

• UK a “third country” and UK Listing Authority no longer a competent authority
• Equivalence

–Market Abuse Regulation, Transparency Directive, Shareholder Rights Directive –Takeovers Directive – UK Takeover Code (e.g. as with Financial Reporting Council)

• Changes?

–European Works Council Directive –Remuneration caps in Capital Requirements Directive (CRD IV)

Publicly listed companies / larger companies

Implications of Brexit

Data Protection Employment Law Energy and the Environment Intellectual Property Litigation and Dispute Resolution Restructuring and Insolvency State Aid

34

• Governing law / jurisdiction / enforceability

–Rome I & II, Recast Brussels Regulation, Lugano, Hague

• VAT

–Sales taxes harmonised since 1977 –UK outside territorial scope of VAT –On ‘import’ from EEA to UK, VAT chargeable (but potentially recoverable)

• Withholding tax

–Half of all non-UK multi-nationals headquarters –Loss of Parent-Subsidiary Directive and Interest and Royalty Payments Directive

• Cannot rely to ensure gross payment of dividends, distributions and patent royalties
• Relief under bi-lateral double taxation treaties?
• To say nothing of tariffs, assuming UK leaves customs union…

Inter-group arrangements, tax and treasury

35

Sector Domestic business earned from UK clients International and wholesale business not related to the EU International and wholesale business related to the EU Banking £65–70 billion £20–25 billion £23–27 billion Asset management n/a £15–18 billion £5–6 billion Insurance and reinsurance £27–29 billion £7–10 billion £3–5 billion Market infrastructure and other n/a £13–15 billion £9–12 billion

Sectoral breakdown of UK financial services revenues 2015

Source: House of Lords EU Select Committee Brexit Report, December 2016

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Directive Outbound Inbound Alternative Investment Fund Managers Directive (AIFMD) 212 45 Insurance Mediation Directive (IMD) 2758 5727 Markets in Financial Instruments Directive (MiFID) 2250 988 Mortgage Credit Directive (MCD) 12 Payment Services Directive (PSD) 284 115 UCITS Directive 32 94 Electronic Money Directive 66 27 Capital Requirements Directive IV (CRD IV) 102 552 Solvency II Directive 220 726

Inbound and outbound passports issued by UK PRA/FCA

Total Inbound Outbound Number of passports in total 359,953 23,532 336,421 Number of firms using passporting 13,484 8,008 5,476

Source: House of Lords EU Select Committee Brexit Report, December 2016

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• Assess passporting reliances

–How much cross-border business? –How long for authorisation from a new regulator?

• “Equivalence”

–Only certain sectors (i.e. Business-to-Business) –Political dimension – European Commission to assess/recommend etc. –Cannot be “back door” around the “four freedoms”

• Transitional measures after Article 50 and EU/EEA exit?

–Jurisdictional assessments on-going but a lot of contingencies

Current position – UK financial services businesses

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• Bespoke to each group

–Where do I do most business? –Outright move one jurisdiction to another? –Outsourcing arrangements – e.g. shared services model?

• Gantt charts / work streams

–Due diligence – e.g. key contracts, authorisations, tax –Implementation

• Business transfer agreements into Irish/UK company (may be either way)
• Article 50 notification, for at least 2 years, UK can still use:

–European Cross-Border Mergers – mergers and divisions –SE Regulation – redomiciles –Schemes of arrangement – UK Companies Act 2006, with cross-border judgment

Brexit restructuring

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• Political decision

–logic/approach will not always be clear –limited legal clarity against backdrop of EU negotiations

• Next steps for a ICSA member

–not “frictionless” but new normal will emerge –groups to assess Brexit impact/changes

Wrap-up

Source: Daily Telegraph

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Questions

williamfry.com

Eoin Caulfield

Partner Brexit Group

eoin.caulfield@williamfry.com T +353 1 639 5192

Cormac Little

Partner EU/Competition

cormac.little@williamfry.com T +353 1 639 5114

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