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No cherries for UK’s Belgian waffle — the Rulebook


A little bit of uncertainty was taken out of markets as the UK, fresh off the back of a bout of direct democracy that left it without a government to speak of, went 180 degrees and filled its political void with unelected officials.

New prime minister Theresa May’s Brexit bunch have been given responsibility of getting the best deal for the UK: presumably a euphemism for the task of monumental legerdemain it would require to convince the EU that it would be OK for the UK to get single market access without being bound by freedom of movement (no pun intended).

There’s little hope of the UK getting that deal, and any optimism that it might seems to be dwindling.

Assuming the EU changes its mind and becomes willing to talk before a triggering of Article 50, the outcome of any negotiations is bounded on two sides. First, it would greatly diminish the integrity of the EU to allow the UK extraordinary exceptionalism with regard to the single market. The EU is much more likely to rush for reforms that would calm their remaining members’ concerns.

On the other side, given that access to the single market is all but guaranteed to come with a meaningful loss of the sovereignty the UK so much desires to get back, it would be political suicide for May’s government to accept the available options for access to it (the Norway model, for example). It would be all the more difficult if access to the single market were deemed by the public to be a concession to the very establishments they basically voted against at the expense of the people. Lower wage service providers aren’t worried about selling their services to France and Germany.

Beat Siegenthaler, macro adviser for UBS, echoed the growing sentiment that waffling on Article 50 and on some non-Norway model single-market access deal isn’t going to help the nation’s negotiating position. In a note on Thursday, he said “in Brussels the consensus is that the UK’s position is weak regardless and will not be helped by postponing the inevitable. Legally, the EU can't force the UK’s hand but in practice, political pressure could quickly escalate.”

And here’s the crucial bit, from a legislative perspective: “So far the EU has always been careful to keep the UK involved in discussions over new legislation, particularly when it comes to financial markets. Not anymore.

The UK will be sidelined in any discussions, and there aren't any major decisions requiring a unanimous opinion — the only opportunity the UK have to wield its veto — until 2020.”

The UK is widely expected to leave by 2019.

The wonderful thing about triggers…

…is that soon they’ll be less of a thing. At least, dividends and AT1 coupons won’t be automatically stopped if capital buffers are breached.

The idea was first mooted by a European Commission expert group in March. Panic in February that banks might not have enough capital to make distributions on equity and AT1 caused an all-out sell-off in both.

Daniele Nouy, head of banking supervision at the ECB, made a move to ameliorate those fears as the results of the European stress tests approach. On Wednesday, she told reporters that Pillar Two capital will be split between hard capital requirements and "guidance".

Nouy wasn’t explicit, but if "guidance" is based on the expert group’s soft Pillar Two idea, then it will sit below capital buffers, meaning that if they are breached, there isn’t an automatic plug put on distributions.

And though analysts still expect some weak banks (read: Italian) to fail the test, this new approach will help keep markets calm in the wake of the results.

Nouy did reserve the right to make "guidance" into "requirements" if the supervisor finds the former approach isn’t working.

Set transparency requirements to phased-in, after a review

The European Commission seems to have shrugged off ESMA’s concerns that a yearly review of bond liquidity would tax its resources and prolong implementation of MiFID II. In a win for lobbyists and members of the European Parliament like Kay Swinburne, MEP for Wales, who fought vocally for a review, the Delegated Act was published on Thursday — and annual phase-ins to more onerous requirements will be dependent on a review of the impact on bond liquidity.

ESMA will have to submit a revised regulatory technical standard (it’s official recommendation for how the law should be written) each year, if it deems the market ready for the next phase.

That means Parliament would get to scrutinise the review before passing the RTS — which is great news for anyone worried about the impact of MiFID II on bond and derivative liquidity.

Hill, we’re not over EU

Former (as of Friday) UK commissioner Jonathan Hill got a sweet send-off from the European Parliament’s Committee on Economic and Monetary Affairs on Tuesday, at which he urged members to continue with the work of Capital Markets Union.

Praise spanned the political spectrum. Sven Geigold, MEP for Germany, said, “We didn’t want you to have that job. And now that you are leaving, we don’t want you to leave.”  Even Maris Matias, leftist MEP for Portugal, joined in.

“I was one of those trying to make your nomination difficult. And also trying to make your work difficult,” she said. “I learned that you are not cynical. You have a better sense of humour than me… I talk to you as a European fellow.”

But further highlighting the divide in UK politics, as well as certain parties’ penchant for nonsensical pugilism, UK MEP David Coburn, a UKIP member, parted from the overall sentiment. Despite Hill’s opening remarks including references to the respect “we must have” for the UK’s decision to leave the EU, as well as disappointment.

“It seems that you’re very popular with many of our European colleagues, but you’re not — obviously — popular with the Great British public which have decided that we want to forge ahead on our own.”

Personally, he said, Coburn didn’t want to “tread on private grief”. But he couldn’t help mentioning the vast expertise he and Nigel Farage (no longer UKIP leader) have had in finance: “We actually know how it works,” and then adding a little Parthian dig: “The British public, whatever you might say, have made a decision. That’s the democratic way we do things, and, you know, that’s the way it is. But, you know, best luck on your next job, whatever it might be,” Coburn said, followed by a brief chuckle.

Hill’s response: “I don’t need lectures from anyone about what the British people have decided. Nor do I need lectures that when the British have spoken you respect their will,” Hill said.

He added that Parliament needs “people who listen to other people in Europe rather than insulting them.”

Coburn, so burned.

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