Brexit and the Buy Side

Last night’s disaster for the UK Conservative Party was the latest bruising at the ballot box for mainstream politics, once again resulting in a populist surge—this time dressed in the colors of Jeremy Corbyn’s Labour—unsettling, if not unseating, the accepted orthodoxy of how things are supposed to work. Few would have thought even a month ago that Theresa May, the British prime minister, would now be fighting for her life, or be forced into an awkward partnership with Irish unionists, but here we are.

The reasons behind this shock turnaround aren’t for this column to explain. What it means moving forward, however, are very relevant for the buy side.

In terms of Brexit, this will likely go one of two ways.

The first is that May now commands an ultra-slim majority dependent on the Democratic Unionist Party (DUP), and scenting blood in the water, the European Union pushes her to accept an unpalatable deal for the UK. A softer Brexit, perhaps, but not one on her terms.

The 27 countries that make up the European Union (EU) and its officers have already made clear their desire for a punitive Brexit, so as to discourage further secession from the Union. This likely means no single market access, no passporting, a relocation of euro-denominated clearing from London to the continent, conformance with European regulation—without a concomitant hand in developing it—and the potential for import-export tariffs that will hurt the ability of UK-based firms to operate freely on the continent.

“Serious damage has been done to the UK’s negotiating position,” says Azad Zangana, senior European economist at Schroders, in a briefing note. “Without a strong mandate, Europe can ignore the UK’s demands. Even the UK’s threat to pull out of negotiations will now appear hollow and lacking the support of the British public.”

Not ideal, then, particularly for banks that might have hoped for backroom deals that would have saved public political face and yet enabled commerce to continue relatively unimpeded.

The second isn’t much better.

Wounded by the result, and the loss of her majority, May could be forced to fall back on her only real avenue of support outside of the DUP—the hard right wing of her party. This could push the UK further towards the hardest of Brexit scenarios, in which the UK leaves in March 2019 without a deal in place, causing enormous disruption to the UK financial services sector. The UK would be left fighting to retain its banks, who have already demonstrated their intentions to bulk up their presence on the continent, its fintech firms, and indeed, its asset managers, who are likely to look to the US or Europe as stronger and more stable prospects.

Even domestically, issues close to the heart of buy-side firms—tax policy, pensions and similar areas—will struggle, according to Steve Webb, director of policy at asset manager Royal London.

“The new Government will also shortly need to make up its mind about future changes to the state pension age, and the loss of a majority in the Commons means that the more aggressive increases which the Treasury would have preferred are now probably off the table,” he says, in a briefing note.

Ultimately, this won’t have an immediate impact on technology. The issues associated with Brexit do have tech impacts of course—not least of all the vast tasks ahead in reference data, order routing and the general upheaval associated with such monumental events. But things are so up in the air right now that a keener eye on the steadily approaching deadline for the Markets in Financial Instruments Directive (Mifid) on January 3, 2018, is more of an immediate concern.

But just because you can’t see the roadblocks ahead, doesn’t mean they’re not just over the horizon.

This week on Buy-Side Technology:

• In an entirely different set of electoral circumstances, voting for the Waters Rankings is closing today (06/09). Make sure that you get yours in, as there will be no further extensions.

• NEX has had a busy week, first announcing its distributed-ledger platform (that fabled blockchain in production, it seems) for foreign exchange and cash equities, then adding Bank of China (Hong Kong) as a liquidity provider for offshore renminbi on EBS Direct. The new Icap, led by Jenny Knott, is going gangbusters.

• Speaking of big developments, IHS Markit casually announced a partnership with CloudMargin for a new collateral management platform. Those of us who have been around this block a few times and remember the heady days of Project Colin will smile, nod, and once again lament the fact that market-wide solutions in this area seem impossible to agree.

• Surveillance continues to be a big topic, as the buy side is driven to take more responsibility for its own actions. Nasdaq thinks it has a way to catch spoofers by visualizing the order book, which in good journalistic fashion we’ve presented like an episode of CSI.

• Some people are still really unhappy about the fact that Bloomberg bought a legacy technology from Barclays, which inherited it from Lehman, and is planning on taking bits of it into its Port product. Then again, if it ain’t broke…

• On the subject of breaking things, I’m now on the podcast instead of Dan. Sorry, he’s not coming back. I’ve been told it’s ‘smoove’ by one press contact, whom I can’t decide is being genuine or really taking the mickey. Anyway, if you haven’t had enough Brexit this week, go back in time for my thoughts on it there, and Sell-Side Technology editor John Brazier’s more cogent thoughts on the aforementioned Point malarkey.

• Finally, some of you may have noticed my face, which isn’t Anthony Malakian’s. I’m the new deputy editor for Buy-Side Technology, and also the news editor for Waters here in New York. Please do send me any news you might have—my email is james.rundle@incisivemedia.com but I prefer the phone, on +1-646-490-3974.