July 2016

Michael Spiegel

On June 23, in a public referendum, the UK voted to leave the European Union. Since this historic vote there has been considerable volatility in the financial markets and an intense focus on what Brexit means for the UK’s commercial and business relationship with Europe...and vice versa

Deutsche Bank was well prepared for Brexit, having planned for a number of scenarios well in advance. Our cash management and trade finance platforms performed well and our systems were well able to sustain the increased volumes and market volatility that resulted in the days following the result.

Deutsche Bank went into this referendum in a good position in terms of liquidity and collateral, and we remain committed to corporate banking, across Europe and in the UK. Questions are being asked about the implications of Brexit on the UK’s commercial dealing with Europe and you will no doubt be familiar with some of the scenarios currently being discussed. These include the models established by Norway, Switzerland, Canada and of course, the World Trade Organisation model, which is essentially a fall back in the event that terms are not reached between UK and the EU once Article 50 is enacted.

At Deutsche Bank we feel well positioned to handle any of these scenarios.   We have had a branch in the UK since the 1870s, and our business has sustained many other events during this period, both prior to and since the formation of the EU. In addition to our branch in the UK, Deutsche Bank also has an onshore UK incorporated subsidiary which is the result of our UK heritage that includes the acquisition of Morgan Grenfell.

In the wake of the UK vote to leave the EU, there is potential for changes to the regulatory “passporting” arrangements between the UK and the EU. There is no certainty about the final outcome here, but as a German bank, headquartered in Frankfurt, with a significant  presence in the UK, Deutsche Bank is well prepared and well positioned to manage such changes should they occur.  In contrast, some of our peers use the passports of their entities in London to gain access to the European financial market.

In summary, whether you are a European based or global client with UK based business and/or operations; or a UK based client with business and/or operations in continental Europe, we are committed to partnering with you to analyse and absorb any future regulatory changes with minimum impact to your banking relationship and set-up.

In the short-term, we would suggest to our clients you take a measured approach to Brexit. As we know, the UK expects to remain a member of the EU and party to all relevant banking agreements and regulations for at least two years once Article 50 is triggered. We do not know on what terms the UK will leave and there will continue to be a high level of speculation about the consequences. However, ongoing dialogue is important and being prepared to act quickly and decisively will be key.
 
Maintaining control and visibility of cash are imperative in times of uncertainty.  Equally important, treasurers may be focused on hedging their FX exposure, especially as we are likely to see continued stress around currencies. Deutsche Bank can assist across all these requirements and help mitigate risks, and I would encourage you to contact us on any of these issues as we have the solutions that can help make your life easier.

For example, automated cash concentration across currencies could help minimize excess balances in non-core currencies.  We also suggest a review of currency hedging strategies that can consider the potential use of forwards. Our partnership with Fireapps and our Autobahn tools can help reduce unexpected volatility of net positions.

We have to assume that the high level of volatility that we are currently seeing will calm, with peaks and troughs in volatility over an extended timeframe. I think that the interim period, which may prolong as negotiations become protracted, is a time for everyone to ensure they take the necessary steps to meet the demands of the outcome.

Throughout this period, Deutsche Bank will continue to analyse developments and will establish a structured, regular dialogue with clients to share views on key issues/risks and potential solutions or mitigants to these. Key areas we are already looking at include implications for treasury set up and locations of in-house banks, shared service centres,Payment on behalf of (POBO)/ Collections on behalf of (COBO); potential impacts on liquidity pooling arrangements; SEPA connectivity for UK based accounts; counterparty risk profile changes; working capital cycle changes through changing commercial terms; plus other key areas.

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