An Update on What's Happening With Brexit
In June of 2016, the United Kingdom voted to exit the European Union. The Brexit process has started, but it could take a couple of years for the separation to be complete.
"(Brexit is) certainly one of the more exciting things that has happened in our industry, in the foreign exchange industry in some time," said Don Lloyd, Manager of Capital Markets – Foreign Exchange, Rate Swaps and Commodity Derivatives at Associated Bank. "You've read about it, you've heard about it, and now it's sort of getting some traction, the wheels are in motion and we're going to put some action to this thing now."
Lloyd notes there's quite a lot for the U.K. to do before ties with the European Union have officially been cut.
"… This is a two-year rollout, they have up to two years once Article 50 goes into motion," he said. "Might be sooner, but let's just plan on the full two years. It's going to be a slow marathon, slow roll to get this thing out. And the markets just have to settle down and realize that. Think of everything that needs to be accomplished as the U.K. pulls out and leaves the European Union. They have to decide trade negotiations, trade agreements, immigration policy, there are so many topics that have to be talked about and ironed out before all this comes to fruition. There's just a lot of work to be done."
This exit does have ripple effects around the globe, and Lloyd said those effects should be accounted for as risk.
"I'm a big believer in markets are as simple as assessing risk for some type of return," Lloyd said. "… And the U.S., like any other country, is going to do the exact same analysis. They're going to assess risk for some kind of return. There's no question that the U.K. pulling out of the European Union creates some uncertainty and some unknown variables, so that whole idea of risk elevates a little bit. The question is, how far will U.S. companies go to sit there and mitigate that risk?"
"Is it just going to be on their radar screen? Are they going to start moving people around? Are they going to start pulling assets out of the U.K.? What is their plan? And those conversations – if they haven't started now – they're going to start pretty soon. And people are going to start to say, 'what exactly is our risk over in the U.K.? What risks are we facing, and what do we want to do about those risks?'"
While some companies might be relocating staff or making other adjustments as a result of Brexit, Lloyd cautions not to discount the U.K. – and London – as having a continued integral role in international relations going forward.
"… You have to remember, London, they've been a center of commerce for thousands of years," Lloyd said. "London's just not going to evaporate off the face of the map. You might reallocate some assets out of it and try to spread the peanut butter a little bit, if you will – spread your risk around – but London's not going to go away."
Its staying power rests not only in its longevity but also in its geography.
"Not only has it been a center of commerce for a couple thousand years, but in today's modern markets just the geographic location of where it's centered, you have a full morning of dealing with the Far East, whether it's Singapore, Tokyo, Hong Kong, you have a full afternoon of dealing with North America," Lloyd said. "You've got a full 10 hours of day of commerce and markets than you span. You don't have that in North America, you don't have that in the Far East. You have that in London."
"Now the question is: is all that just going to be uprooted and put into a Frankfurt or some other place on the mainland? You might see some bleeding that goes on there just in case the U.K. diminishes in its stature, but you're not going to turn that over time, that could be a 10-year thing, if it even gets traction at all."
"But I think that there's going to be a lot of discussion around what are the risks, what are we facing, how do we mitigate those risks and how do we spread that out, but London's not going go away as a financial center by any stretch of the imagination."
Global trading, in the meantime, will continue taking place every moment of every day, as it always has.
"The movement of money, whether that's by trade or investment, I mean it all flows through the foreign exchange markets," Lloyd said. "The speed at which money and commerce can occur, it's instantaneous. Billions of dollars can be moved and agreements and communication (can happen). You sort of say, look how much ground we've covered in 50 years, where are we going to be in the next 50 years? How much faster can it really get? But the world's getting smaller."