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Bracing for Brexit: What Are the Treasury Implications?

  • By Andrew Deichler
  • Published: 6/14/2016
We have just over a week before the referendum that will determine whether the UK will leave the European Union. While British citizens appear split over whether they want their country to leave or not, many corporate treasurers are hoping that it doesn’t, given the implications it has for FX exposures and trade.

In its Brexit checklist, the Association of Corporate Treasurers (ACT) stressed that corporate treasury departments should increase communication with the rest of the business units, to understand what changes may need to be made, regardless of the outcome of the referendum.

The ACT noted that simply calling a vote has created volatility in the financial markets, which is sure to increase if the UK decided to leave. Therefore, the ACT stressed that businesses must manage their financial exposures to protect profit margins. Nevertheless, the uncertainty over the vote makes hedging difficult.

This sentiment was echoed in February at the ACT Cash Management Conference in London by Julie Fabris, treasurer for Britax Childcare Group, a UK-based manufacturer of children’s car seats. In a panel discussion, she voiced her concern that there is presently a lot of volatility in the FX market and it’s only going to get worse for companies like hers, which have a lot of FX exposures. “You can already see it in the sterling/euro rates at the moment,” she said. “In the long term, I think there’s a risk to Europe itself.”

Given the current state of volatility and the implications of the referendum, Natasha Lala, managing director at FX brokerage OANDA, is seeing treasury departments giving their risk portfolios a heightened amount of attention. “What we’ve seen over the years is, people would look at their portfolios a couple times a month. Now, they’re doing it every day,” she said. “That’s not something we’ve seen before. So instead of asking us for an exchange rate and the end of the month as a closing-the-books exercise, they request it on a daily basis.”

FX volatility stemming from the referendum has major implications for the UK’s manufacturing sector, Lala noted. “Exporters are in the middle of this see-saw battle right now,” she said. “If the pound is lower, it would, in theory, benefit you. However, there’s a lot of wait-and-see, and it’s not really benefiting exporters because a lot of trade partners are trying to figure out if they should continue to have these trading arrangements. So if it plays out that Britain exits, there worst case for the manufacturing sector is that business goes somewhere else.”

What treasury must consider

Given the uncertainty over what might happen, the ACT presented several areas that will be impacted by the UK either remaining or leaving. The association stressed that treasurers whose companies are based in the UK, have subsidiaries there, or simply do business there take these into consideration.

Governance: The ACT noted that the outcome of the referendum may require changes to treasury policies if the business itself requires some reengineering to adjust to a post-Brexit world or if access to certain types of financial markets and products is altered. Leaving the EU may also have an impact of free movement of labor across the EU, i.e., UK employees may soon require work visas to operate in the EU, and vice versa.

Corporate funding: UK businesses may find a reduction in their choice of banks; for example, non-eurozone banks may eschew operating within the eurozone. Exiting the EU could also affect UK businesses that borrow from the European Investment Bank (EIB) or that access EU governmental loans and grants. Lastly, a possible outcome of the referendum could be a review of the UK’s sovereign credit rating, which could affect UK companies’ own ratings.

Cash management and liquidity: Treasurers should review their cash pooling arrangements, regardless of the outcome on June 23. Banking separation within and outside the EU and further eurozone banking union could complicate pooling across entities and banks. Treasury departments should also ensure their relationship managers are aware that they need to be kept up to speed on any planned changes to cash management systems and processes. Additionally, they should consider whether shared service centers in Europe will still be efficient for handling UK business.

Risk management:
Treasurers should consider the effects the outcome of the vote could have on their organization’s risk management framework. Brexit could change a business’ risk profile it its locations were selected to facilitate cross-border trade. With FX volatility on the rise, treasury departments should also consider how protective of profit margin they should be where costs and revenues are impacted by foreign currency.

Accounting, tax and regulation:
Lastly, the ACT noted that the changes that Brexit could bring about highlight the need for treasurers to get their EMIR reporting validated, reconciled and paired. “For UK companies, this is not the time to be fending off an FCA compliance visit,” the association wrote.
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