brexRisk® - enabling mutual fund managers and directors to exercise their respective responsibilities by assessing and addressing the risks and opportunities posed to their fund portfolio by the Brexit process on an ongoing, informed basis.

The narrative

On June 23, 2016 the United Kingdom voted to leave the European Union. On March 29, 2017 UK Prime Minister Theresa May triggered Article 50 of the Lisbon Treaty to begin the two-year negotiation process for Britain’s withdrawal from the EU.

The political chaos that ensued will go down as one of the most turbulent and unsettling periods in British history. On 12th December Prime Minister Boris Johnson’s Conservative Party secured a comfortable working majority of 80.

The UK left the EU on 31st January 2020 on the terms repeatedly rejected by the outgoing parliament.

“There is nothing to win in this process and I am talking about both sides. In essence, this is about damage control.”

Donald Tusk, European Council President

Complex negotiations on the terms which will govern henceforth Britain’s relationship with its former EU partners have begun. This process, which the Prime Minister wishes to conclude within twelve months, has large and lasting implications for mutual funds invested in areas vulnerable to the potential turbulence these new arrangements may cause.

The risk of disruption to markets as talks progress is clear and present. The process will not be without disagreements along the way. A leading New York law firm has estimated that “thousands of financial contracts, collectively valued at $2.7 trillion, give or take a few hundred billion, could be affected”.

In the kaleidoscope of constantly changing scenarios as negotiations proceed, managers and directors of mutual funds will inevitably find themselves confronting unfamiliar hazards - and, on occasion, unexpected market opportunities.

Following the referendum vote, around 400 SEC-registered public companies disclosed Brexit-related risk factors in their quarterly reports and at least 35 companies disclosed Brexit-related risk factors in registration statements filed with the SEC. Recently, that figure mushroomed.

“My personal view is that the potential impact of Brexit has been understated.”

Jay Clayton, Chairman of the US securities and Exchange Commission

SEC Chairman, Jay Clayton, is on record as saying: “I would expect companies to be looking at this closely and sharing their views with the investment community.”

SEC staff continue to encourage companies to consider disclosing the risks Brexit poses to their businesses. Such disclosures typically include continuous evaluation of exposure to UK and EU markets and to currency movements relating to the pound sterling and euro; monitoring any guidance that may be provided by the SEC on Brexit disclosure; monitoring the economic and political situation as negotiations on the future of Britain and the EU proceed; regularly updating assessments of Brexit-related risk factors to ensure disclosure is not outdated, misleading or excessively generic.

The impact of Brexit, and the evolving new regime that will govern the UK’s relationship with the EU, will be felt over many years and all reporting companies that may be affected should prudentially consider disclosure of Brexit-related risks in public filings.

There is no roadmap to follow, or precedent to cite, as a guide or pattern for how the ebb and flow of negotiations, and the disruption caused by any “road bumps” along the way, will influence markets in the months and years to come. Even before the formal negotiations began post January 2020, the Brexit decision had already moved markets and currencies in unpredictable ways.

A flight to safe haven markets, currency fluctuations and the increasing intervention of the European Central Bank as risk premiums across the Eurozone rise, have characterised the first period of Brexit negotiations. Turbulence will persist as the Brexit terms of trade are hammered out.

In this ebb and flow of changing risk, directors and trustees, in fulfilling their fiduciary responsibilities, will wish to keep themselves informed

brexRisk® supplies such a service, tailored to the specific concerns of individual clients.