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Brexit File Last Updated: No. 3 5th January, 2018

See previous files: June 2017 September 2016 The Drama ……………………..

UK EU Membership Ends 11.00 p.m. UK time December 8 2017 March 29 2019

Preliminary Separation Possible Transition Negotiations Ratification Issues Agreement Period

Single market UK Parliamentary approval of the EU Withdrawal (Great Divorce bill Repeal) Bill Customs Union A possible 2 year Northern Ireland border transition period to Movement of people Ratification by European Council and European smooth implementation UK citizens living in EU, and business disruption European Court of Parliament & EU citizens living in Justice jurisdiction UK Ratification by qualified majority of EU members Transition period (at least 20 Member States must approve the terms)

2 Separation Issues

Primary Items Background UK perspective EU perspective for Negotiation Divorce bill UK not legally obliged to pay anything, No official estimates published but The EU wants the UK to settle any but this would threaten a post-Brexit figure below £40bn expected outstanding bills before it leaves trade deal. Costs include:

Outstanding EU budget commitments

Pension payments to EU officials

Cost of relocating EBA and EMA

Rights of EXISTING Cut off date for residency under this Any EU citizen already living and UK citizens in the EU will also retain EU and UK citizens agreement is 29th March 2019 working in the UK will be able to their current rights (rights protected carry on working and living in the UK for residence, after Brexit work, social security and health) Northern Ireland Both sides agreed to a border with no UK will maintain full alignment with those rules of the Internal Market and the Border physical infrastructure such as customs Customs Union which, now or in the future, support North-South cooperation, posts the all island economy and the protection of the 1998 Good Friday Agreement

Membership of EU Relocation of European Banking European Banking Authority will relocate to Paris bodies Authority and European Medicines European Medicines Agency will relocate to Amsterdam Agency

3 Key Items for Negotiation

Primary Items Background UK objectives EU objectives for Negotiation Access to single Ensures the “four freedoms”: free May wants a bespoke trade deal EU says that the UK cannot access the (internal) market movement of goods, services, capital with the EU single market whilst limiting and labour movement of people from its member November 2017 UK budget set aside states £3billion to prepare for a “no deal” Brexit

The UK has asked for a transition period of about two years while remaining part of the Single Market and Customs Union Access to customs • EU member states trade freely with Some form of free trade agreement. No sweetheart deal union (agreement each other without customs checks not to impose EU member states all charge the Under a free trade area no tariffs, Without a Customs Union in place, all tariffs) same import duties to countries taxes or quotas are charged within UK-EU trade would require customs outside the EU the area but members are free to clearance and would have to operate • EU member states have limited strike their own external trade deals under World Trade Organisation rules freedom to strike their own trade deals

European Law The European Court of Justice is the The European Union (Withdrawal) highest court in the European Union in Bill will end the primacy of EU law in matters of European Union law and the UK and incorporate all EU interprets and enforces the rules of the legislation into UK law in one lump, single market and settling disputes after which the government will between member. decide over a period of time which 4 parts to keep, change or remove Financial Services & Regulation

EU Passport Is a legal mechanism that permits financial services companies based and regulated in British banks will lose “passporting one country of the EU and authorised under one of the EU’s single market directives, to rights” to do business in the do business in other member states purely on the basis of their home state European Union after Brexit. authorisation. Equivalence When assessing the operational rights or treatment of foreign banks in the EU the EU assesses whether the standards of regulation and supervision in a bank’s home market Equivalence is at the EU’s discretion are ‘equivalent’ to those of the EU. Comments & Facts:

British Bankers’ Association 75% of FX deals settled The impact of establishing Transposition work on said that the loss of through London based CLS subsidiaries instead of migrating EU regulatory passporting would be International Bank which is branches & ring fencing on framework to UK framework “disruptive, costly and time- regulated by US Federal capital requirements consuming”. Reserve . Initial aim is to align as far Large EU banks may have EU banks will still need Cost likely to be passed on as possible to allocate more capital access to London

5 Treasury Matters

6 Treasury Impact

The implications of the Brexit decision is far reaching effecting British, European and global interests from political, economic and socio-economic perspectives.

The effect on corporate treasury matters will impact:

Financial Risks Funding Cash management

• Currencies • Liquidity • Cash flows • Interest rates • Debt management • Bank account location • Counterparty risk • EIB loans • Cash management • Pension management • Capital Markets Union structures • Taxation

Organization Regulation

• Legal structure • UK Treasury FINCO • EMIR location • MiFID II/MiFIR • Personnel

7 Financial Risks

Currencies EUR GBP since 2004 EUR GBP since 2015 1 0.95 0.95 0.9 0.9 0.85 0.85 0.8 0.8 0.75 0.75 0.7 0.7 0.65

0.6 0.65

01/01/2015 01/03/2015 01/05/2015 01/07/2015 01/09/2015 01/11/2015 01/01/2016 01/03/2016 01/05/2016 01/07/2016 01/09/2016 01/11/2016 01/01/2017 01/03/2017 01/05/2017 01/07/2017 01/09/2017 01/11/2017 01/01/2018 EUR/GBP: Upside risk for GBP weakness continues but is historically limited. How much of Brexit is already discounted?

GBP USD 2.1000 2.0000 GBP/USD: 1.9000 1.8000 1.7000 Sustained USD strength has big issues for 1.6000 USD reporting multi-national firms and US 1.5000 exporters to the UK 1.4000 1.3000 1.2000 1.1000 8 Financial Risks

EUR GBP 12mth IR Differential Interest rates 1.6 1.4 1.2 Interest rate 1 differential 0.8 repositioned due to higher than 0.6 expected UK 0.4 growth & inflation 0.2 0 -0.201/08/2012 01/08/2013 01/08/2014 01/08/2015 01/08/2016 01/08/2017 -0.4

12month EURIBOR 12month LIBOR

Counterparty Risk

Agency Pre Brexit Brexit Impact Comment Continue monitoring Bank Standard & Poors AAA AA negative CDS spreads. Be wary if any Moody’s Aa1 stable Aa2 stable UK downgraded since last Brexit file report – main institution September 22 2017 goes above 100bps. Fitch AA+ AA negative

9 Other Treasury Matters

Treasury Matter Issue Status

Pensions deficits increase due to Pensions Impact of uncertainty on growth, interest rates and equities continuation of low interest rate expectations

£52bn over 10 years into UK projects European The annex to the EU-27 negotiating position states that the UK will be Investment Bank Issues: departing the EIB, in which it is a 16.1% • Standing of existing loans shareholder. The UK will expect to be • Brexit Mandatory Prepayment Event credited with the value of these shares • Access to future infrastructural EIB debt

CMU is a plan of the European Commission to mobilise capital in Action Plan: Capital Markets Europe through deeper and more integrated capital markets to https://ec.europa.eu/info/business- Union lower the cost of funding and make the financial system more economy-euro/growth-and- resilient. All EU Member States will benefit from building a true investment/capital-markets-union_en single market for capital

Bank account The ‘passporting’ / equivalence issues may cause a problem with location Keep this item under review. having cash pool header accounts located in London and in future Develop a contingency plan. outside of the EU

OTC derivative reports is a G20 initiative. Unclear: EMIR EMIR reporting applies to EU member states. UK could transpose EMIR or establish a Other jurisdictions have introduced their own rules (Dodd Frank, unilateral set of rules. FinfraG, Canada CSA, ASIC) Some changes to EMIR rules late 2018 10 Actions

11 Key Treasury Questions

Impact on cash What will be GBP value and pool structures the impact on volatility? located in financial London? markets?

Will passporting WHT on inter- effect services Availability of company loans provided by any expert under new trade relationship resources? agreement? bank?

12 Action Plan

Short Term Medium Term Long Term

Risk Review Planning Response

Cash flows Financing Regulation - Availability - EMIR Liquidity - Pricing - Terms & conditions Capital Markets Union FX - EIB debt Taxation Interest rates Location of bank accounts - WHT on interest and dividends Banking Cash management - VAT structures - Customs/excise Contract terms duties Pensions Covenants Organisation - Availability of Investment resources

Economic growth

Set-up an internal/external Brexit expert group

13 Contact

FTI Treasury International House 3 Harbourmaster Place International Financial Services Centre (IFSC) Dublin 1 Ireland +353 1 6360000

www.ftitreasury.com [email protected]

‘The Dublin-headquartered specialist treasury company’

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