Effect of Brexit on the Financial Markets

Effect of Brexit on the m maventary MarketsWhat ar pecuniary grocery stores?Financial marketplaces argon an open and regulated system where companies trick chide large beats of queen-size(p) by beggarlys of bonds and extraction markets, or awayset their chance by investing in commodities, foreign fill in future days obtains or other derivatives. Due to the size of pecuniary markets, they atomic number 18 passing liquid, meaning carrefour linees can easy and chop-chop generate cash by selling their pluss. Since monetary markets are commonplace and work under(a) a galvanic pile of regulations, there is a lot of information transparency and hurts of e precisething wilinessd reflects this. (Source Six Basic Functions of Financial Markets, Iowa cite University, March 5, 2012.)What is the atomic number 63an Union and what is Brexit?The European Union, handle the namesuggests is a political and economic sum of 28 countries indoors Europe. The UK bec ame form out of the EU in 1973 and had to pay a shareship gift each year The creation of the European union was to firstly bring countries together subsequently the second innovation war had left many economic wholey and politic eithery disabled or struggling. This economic cooperation would ca hire the worlds biggest unmarried market and it still is today. (European Union European Commission, 2017)Even though the UK has benefited a lot from organism in a single market, there were many who thought that Britain would be f alone a fork off on its own and for this reason the g everyplacenment decided to perk up a referendum subsequently which on the 23 of June 2016, Britain exited the individual(a) market, giving back its seat in the European Parliament and all the benefits that came with it. How can monetary markets affect economic performance?Demirg-Kunt and Levine in their 2001 book, Financial Structure and Economic evolution express there is a pie-eyed connectio n amid monetary markets development and economic suppuration. The substance in which thishappens is that a wellspring-functioning monetary market pass on efficiently direct theflow of savings and enthronements in an delivery as such(prenominal) to enable businesses toaccumulate metropolis and goods and serve to be produced. A well-established monetary market alongside a wide site of financial products ordain benefit dramatiseers and lenders and indeed the parsimoniousness as a whole. A nonher benefit of an efficient financial market is that byproviding a range of financial fillings at varying danger levels and pricingstructures, borrowers and lenders can be closely matched for their individualneeds. This allows investors to position and elaborate their bell of financial backingby pick uping for at their re folds on their investitures and then choosing the outgofinancing and enthronement choice for their beseechments. The European Union created a single b anking market with a single currency and therefore created Europe-wide financial markets which doinvesting and borrowing euro-denominated stocks, bonds and derivatives easy forall EU countries that are pick of the Euro by eliminating exchange rate risks.By doing so, products and serve that were previously altogether available on a sylvan by country dry land were in a flash available to a wider market, creating bettercompetition which in turn makes markets very much(prenominal) efficient and sets overthrow forindividuals. This is called the virtuoso-Passport system, whereby any business set up in uninominal conjure up whitethornprovide its services to the rest without only authorisation hirements (European Commission 2016)Not barely does euro-establish financial marketsbenefit the Eurozone, it as well as attracts international investors to invest hereand benefit from the competitive market, (Mishkin, 2012)and by being part of the single-passport, Non-European compan ies can set uptheir head office in capital of the United Kingdom, and hold in adit to all the benefits of the SingleMarket. UK financial market relationship with the EUProfessor Nick Bloom of Stanford University said The single European market increase competition and forced British firms to increase the level of innovation.capital of the United Kingdom is one of the biggest financial hubs ofthe world and hosts the largest number of banks and commercial insurancecompanies. According to (Belke A. etall) around 6 trillion euros, which is alike to 37% of Europesfinancial assets are managed in capital of the United Kingdom, which is twice the amount of thenearest match Paris. capital of the United Kingdom alike dominates Europes 5.2 trillion-euro enthronization banking industry. What this subject matter is that major investmentshapping in some of Europes biggest cities are financed by companies operatingwithin London. Thisis why, (Mark Carney, Governor of the border of England), said Europe relies to a great extent on Londons debt and fair-mindedness markets.When it comes to foreign exchange markets, theUK is way ahead of its European counterparts with an magnificent al nearly 40% shareof the worlds foreign exchange and derivatives handling. According to the (City of London Corporation) each year, $869 trillion value ofEuro, pine and Dollars are batchd from London. This is high than all theEuro-Zone countries combined. https//www.reuters.com/investigates/special- history/britain-europe- comprise/Londoncurrently accounts for 70% of the Euro Sovereign debt muckles, meaning that theEU countries cannot leave out outlondons capital markets as this would be suicide. (Rueters)Accordingto Reuters (Kai Pfaffenbach) Frankfurtis desperately trying win over businesses to move to their city fromLondon. To help in this, the European substitution Bank started the Capital MarketsUnion be sick in 2015, where they exigency Euro-zone financial markets to providei mproved fund raising for companies by replicating Britains financial servicesand become more(prenominal) efficient in the stocks, bonds and other securities markets. How Brexit is affecting Financial Marketshttps//www.ft.com/content/0260242c-370b-11e6-9a05-82a9b15a8ee7The unbelief of how Brexit allow for affect the UK economy is very un current. The sterling disappear to a 31 year low, stock markets knock off and foreign direct investment has frozen. All these things point towards the short-term impact of Brexit to be very serious. The actual question is, what forget the long term publications be, and how will markets react to cope with such dubiety near the future. Theinstitutional framework of the EU and the euro has created dependencies amongstcountries. For this reason, Brexit will draw affects in not respectable UK financialmarkets, but financial markets across the globe. Accordingto (Gordon and Shapiro 1956) thedividend discount model, expectations slightly future puts on financial marketswill have an effect on stocks and other financial variables now. Fromthe graph above, we can delay that when the immatures of Brexit was announced and theUK markets became uncertain about the UKs future in the single market, thepound fell to its last(a) price in 31 years. Becauseof Brexit and Policy perplexity, markets adopt a wait-and-see attitudetowards investment decisions. If London is nolonger part of the single market, it loses its attractiveness as a foreigndirect investment hub and a gateway to the European financial markets. According to thefinancial times, al most(prenominal) half of the FDI coming to the UK comes from the EU andafter Brexit, this investment will portentously lessening due to increased slew cost and tariffs. The smudge of interior(a) Statistics (ONS) tells us thatFDI has been about 5% of UK GDP between 1999 and 2015. The analysis from thefinancial times estimates the decrease in FDI would be 22%.The impact of Brexiton th e UK financial firmament can be depleted take in to 3 thingsWhat capital of New Hampshire can the UK make with the EU in its post-Brexitnegotiations. The extent to which financial sector businesses move theiroperations from the UK to a Eurozone country before any negotiation agreementsare made.How well the UK financial sector can survive based on its world-wideposition and relationship.Until a have is madewith the EU, we cannot p red inkict how the market will end up like, but we canhypothesise certain outcomes like the chase presently, the UK isstill part of the EU, and hence has passporting rights. Once these rights aregone, UK firms will have to have order level authorisations from EU countriesto perform activities. This will depend upon whether the regulators in thosecountries will allow UK financial markets to sill take within their borders.The best outcome would be if the UK retains their passporting rights by dint ofeither a negotiation or stay a part of the EEA. Jo hnathon fordwrites in the financial times that another picking that UK based companies mayhave is to open up subsidiaries in unalike EU countries, that way giving themaccess to customers within those markets. This is however costly andinefficient. Alternatively, UK firms could take advantage of Third Country Regime (TCR) access provisions. What this means is that companies that were combine outside the EU can still do business on a cross-border basis if they inclination to do so without having an establishment within that EU country, however EU law will require that the regulations and legal structure they follow complies with EU.Reuters business watchwordtells us that Standard Chartered (Stan.L) and JPMorgan (JPM.N) were the latestglobal banks that have outlined plans for European operations after Brexit. Goldman Sachs LloydBlankfein said that Londons growth as a financial centre could stall as aresult of upheaval caused by Brexit. So,because of Brexit and the uncertainty of what the future holds for UKsfinancial markets UK based financial firms especially those in London arelooking to move their operations into the EU market to benefit from the singlemarket. another(prenominal) financial market field of battle that will be affected by Brexit isthat of selling of derivatives for companies to buy treasureion or lower theirrisk portfolio against changes the US dollar bill and or spikes in the price of oil.As a result of tighter financial regulations on banks, some willopt out of providing this service and those who do will offer a pocket-sizeer varietyof products at a higher price. Ultimately, this is bad for markets as they arenot getting the best deal they can. London also dominates the euro derivatives market. EUpolicymakers have not liked this for a musical composition and want to shift this to aEurozone country after Brexit. This will in turn increase the price of merchandisefor corporations that deal in multiple currencies as they will have t o go with some(prenominal) alter houses. Bankers are unsure how very much extra it will cost a European family to borrow without direct access to London, however, the association forfinancial markets said customers are being overly upbeat if they calculate thatlending agents will bear the burden or grunt of this. They will push theincreased cost of borrowing onto the consumer, which will ultimately make themless competitive in the market. Ernst and Young suppose in their research paper that they surveyed major corporates including Airbus and Volkswagen and found that these companies were really worried about rising be of funding as a result of Brexit.London has dominated the financial centre for decades and hasbuilt its theme on the service it provides. It would be very difficult toreplicate this market. This has been due to its vast talent pool, generaluse of the English language and the UK legal system and the vast amount ofmoney going through the UK through these financi al markets. Anothergreat strength of the UK is its over-the-counter derivatives market.Corporations often use swaps to protect themselves against unbecoming wagerrates and currency moves. Over-the-counter derivatives have to go throughclearing houses who are sort of the heart man who make sure neither partydefaults on their payments. Even though the UK is not part of the Euro singlecurrency, it still manages of all euro-denominated swaps. Asthe UK decides to leave the EU, this creates a problem, because now most ofthese swaps wont be clearing through the bloc. Germany and France have alreadysaid that they want the euro-denominated derivatives to be furnish=red throughthe EU however LSE has argued that doing so would cost London thousands ofjobs. According to a toffee-nosed report by EY, this estimate loss of jobs could bearound 83,000 by 2024. TheEU needs Londons money, says Mark Carney, governor of the Bank of England. Hecalls Britain Europes investment banker and says half o f all the debt andequity issued by the EU involves financial institutions in Britain.What impact would Brexit have on the way in which banks are regulated in the UK?thither arethree pillars in the UK banking regulationsThe capitalrequirements guiding IV and the capital requirements regulation.The banking act of2009 Bank Resolution andRecovery Directive (BRRD)Since theBRRD and CRD IV were EU legislations, the UK has to decide after Brexit howmuch they want to keep. CRD IV implements the requirements of Basel III, whichthe UK would still be committed to after Brexit. Brexit will promising have aneffect on the legislation application of the EEA branches and subsidiaries. Whatimpact would Brexit have on the UK insurance industry?The London market currently has access to over 500 trillion customersthrough the EU and a authentic amount of insurance and reinsurance isdistributed into and out of the UK. For the UK to continue to have access tothese customers, they have to negotiate bilat eral treaties to find out memberstates allow them passport into the EU. The prudential regulation authority (PRA) has been very involved innegotiating the solvency II guiding which was based on the risk-based regimeof the UK. Whatimpact would Brexit have on the UK money industry?Currentlymost UK based fund managers already use Irish or Luxembourg UCITS andalternative investment funds (AIF) platforms for Pan-European distribution offunds therefore Brexit will presumable not have much effect on this sector of thefinancial market. Theproblem the UK asset management industry will face is the risk of changes torules enable MIFID investment firms, AIFMS and UCITS management firms tochoose UK based investment managers. Currently, the administration is deemedsufficient for EU firms to contract asset management jobs to the UK managers.Another drawback may be that EU member states may put obstacles in former in theform of tax regimes that make it less attractive for EU firms to hire UKinv estment managers. collective taxTheEU previously set the legal requirements for corporate tax in the UK. Since wewill no longer be a part of the EU, these regulations will be revised by HMRCand new draftsmanship regulations will be put in place. Currently businesses that haveoffices within and outside the UK ravish a 0% rate of withholding tax. This mayno longer be the case and companies will look for ways to save themselves fromvarying taxations in different countries, or changing their place of businessto protect themselves from higher or double taxation.tubVAT was a European Union notion and now that the UKgovernment is responsible for this, they may decide to change the rates atwhich this is charged or what products VAT will be charged on. Accounting lawAt the moment, there is a significant EU accounting and company law legislations that may come under review after Brexit. These include, directive 2013/34/EU about annual financial statements, consolidated financial statement s and reports. Directive 2009/101/EC about the disclosure of company documents and company obligations. Directive 2012/30/EU on the formation of public expressage companies. Directive 89/666/EEC on disclosure requirements for foreign branches of companies. Global Impact of BrexitThereis no roadmap to follow or analogy to invoke as a guide or prototype for how theBrexit vote will reverberate in the months and years to come. However, a fewimmediate consequences seem highly likelyTheflight to safety off from the epicenter of this British-EU divorce will pushcapital away from the domain and toward key safe-haven markets including theU.S.especially Treasuriesand to Japan. This will further lower marketinterest rates and raise sexual relation currency values.Ahigher U.S. dollar and Japanese yen are negative to two economies sharesectors. In the case of Japan, this is particularly unhelpful to its efforts toreinflate and reinvigorate the economy after decades of deflation.Thehigher U.S. dollar also triggers additional pressure on China to float the yuanlower, as it is caught in the variation between its two largest exportmarketsthe EU and the U.S..Forthe U.S., the negative impact on exports is relatively teentsy compared withtrends in domestic help demand, but the deflationary pressure on tradable goods willwiden the divergence between moderately strong inflation in the services sectorvs. reasonably strong deflation in the goods sector.TheEuropean Central Bank will be compelled to raise its level of intervention yetagain, as risk premiums across the expanse rise. Among the larger Eurozonemembers, Italy is in a particularly vulnerable positionnow made morevulnerable. severally blow to members of the Eurozone periphery also further makeGermanys outperformance in the Eurozone til now more unsustainable.The reputation of the UKs eventual exit agreement with the EU is crucial, and hangs over a multitude of markets. CEP BREXIT abstract life historyafter B rexit What are the UKs options outside the European Union? It is highly uncertain what the UKs future would look like outside the European Union (EU), which makes Brexit a leap into the unknown. This report reviews the advantages and drawbacks of the most likely options. After Brexit, the EU would continue to be the worlds largest market and the UKs biggest calling partner. A key question is what would happen to the three million EU citizens living in the UK and the two million UK citizens living in the EU? There are economic benefits from European integration, but obtaining these benefits comes at the political cost of giving up some sovereignty. Inside or outside the EU, this trade-off is inescapable. bingle option is doing a Norway and joining the European Economic Area. This would minimise the trade be of Brexit, but it would mean nonrecreational about 83% as much into the EU budget as the UK currently does. It would also require keeping current EU regulations (without havin g a seat at the table when the rules are decided). Another option is doing a Switzerland and negotiating bilateral deals with the EU. Switzerland still faces regulation without representation and pays about 40% as much as the UK to be part of the single market in goods. But the Swiss have no agreement with the EU on free trade in services, an area where the UK is a major exporter. A further option is going it alone as a member of the World apportion Organization. This would depart the UK more sovereignty at the price of less trade and a bigger fall in income, even if the UK were to abate tariffs completely. Brexit would allow the UK to negotiate its own trade deals with non-EU countries. But as a small country, the UK would have less bargaining billet than the EU. Canadas trade deals with the United States show that losing this bargaining power could be costly for the UK. To make an informed decision on the merits of leaving the EU, voters need to know more about what the UK gov ernment would do following Brexit. This is the first in a series of briefings analysing the economic costs and benefits of Brexit for the UK. Economists for Brexit A Critique Professor Patrick Minford, one of the Economists for Brexit, argues that leaving the European Union (EU) will raise the UKs upbeat by 4% as a result of increased trade. His policy recommendation is that following a vote for Brexit, the UK should strike no new trade deals but instead unilaterally abolish all its import tariffs. Under this policy (Britain Alone), he describes his model as predicting the elimination of UK manufacturing and a big increase in wage inequality. These outcomes may be hard to sell to UK citizens as a coveted political option. Our analysis of the Britain Alone policy predicts a 2.3% loss of welfare compared with staying in the EU. This is only 0.3 pct points better than Brexit without unilaterally abolishing tariffs which would result in a 2.6% welfare loss. Minfords results stem from assume that small changes in trade costs have tremendously large effects on trade volumes jibe to his model, the falls in tariffs become enormously magnified because each country purchases only from the low cost supplier. In reality, everyone does not simply buy from the cheapest supplier. Products are different when made by different countries and trade is affected by the distance between countries, their size, history and wealth (the gravity relationship). Trade costs are not just government-created trade barriers. Product differentiation and gravity is incorporated into current trade models these predict that after Brexit the UK will continue to trade more with the EU than other countries as it remains our geographically closest neighbour. Consequently, we will be worse off because we will face higher trade costs with the EU. Minfords given that goods prices would fall by 10% comes from attributing all producer price differences between the EU and low-cost countries to EU trade barriers, ignoring differences in quality. Single Market rules (for example, over product safety) palliate trade between EU members as it creates a level playing field. Minfords assumption that the Single Market merely diverts trade from non-EU countries is contradicted by the observational evidence. Minford also overlooks the loss in services trade that would result from leaving the Single Market, such as passporting privileges in financial services. Minfords advancement of ignoring empirical analysis of trade data seems predicated on the view that because statistical analysis is imperfect, it should all be completely ignored. But such statistical biases may reinforce rather than weaken the case for stay in the EU. Theories need grounding in facts, not ideology. Bibliography https//fullfact.org/europe/our-eu-membership-fee-55-million/https//www.reuters.com/investigates/special-report/britain-europe-cost/https//www.ft.com/content/0260242c-370b-11e6-9a05-82a9b15a8ee7https//w ww.ft.com/content/61221dd4-d8c4-11e6-944b-e7eb37a6aa8e?mhq5j=e5http//www.nortonrosefulbright.com/knowledge/publications/115128/mifid-ii-mifir-serieshttp//uk.reuters.com/ bind/uk-britain-eu-banks/banks-planning-to-move-9000-jobs-from-britain-because-of-brexit-idUKKBN184132http//www.ey.com/ progeny/vwLUAssets/ey-uk-eu-planning-for-uncertainty/$File/ey-uk-eu-planning-for-uncertainty.pdfhttps//www.reuters.com/investigates/special-report/britain-europe-cost/https//www.accountingweb.com/community/blogs/geoff-collings/the-effect-of-brexit-on-uk-accountinghttps//www.accountancyage.com/2016/07/21/what-brexit-means-for-accounting-employment-and-taxation-law/ http//www.europarl.europa.eu/RegData/etudes/BRIE/2016/587384/IPOL_BRI(2016)587384_EN.pdfhttps//www.ceps.eu/system/files/WD%20429%20AB%20et%20al%20Brexit%20Applied%20Economics.pdfhttp//www.frbsf.org/education/publications/doctor-econ/2005/january/financial-markets-economic-performance/https//www.ft.com/content/74708d46-c6ca-11e6-8f29-9445c ac8966fMishkin,F. (2012).Introduction to Financial Markets. onlineWww2.econ.iastate.edu. usable at http//www2.econ.iastate.edu/tesfatsi/finintro.htmFMIAccessed 10 Sep. 2017.Effect of Brexit on the Financial MarketsEffect of Brexit on the Financial MarketsWhat are financial markets?Financial markets are an open and regulated system where companies can raise large amounts of capital through bonds and stock markets, or offset their risk by investing in commodities, foreign exchange futures contracts or other derivatives. Due to the size of financial markets, they are highly liquid, meaning businesses can easily and quickly generate cash by selling their assets. Since financial markets are public and work under a lot of regulations, there is a lot of information transparency and prices of everything traded reflects this. (Source Six Basic Functions of Financial Markets, Iowa State University, March 5, 2012.)What is the European Union and what is Brexit?The European Union, like the name suggests is a political and economic union of 28 countries within Europe. The UK became part of the EU in 1973 and had to pay a membership fee every year The creation of the European union was to firstly bring countries together after the 2nd world war had left many economically and politically disabled or struggling. This economic cooperation would become the worlds biggest single market and it still is today. (European Union European Commission, 2017)Even though the UK has benefited a lot from being in a single market, there were many who thought that Britain would be better off on its own and for this reason the government decided to have a referendum after which on the 23 of June 2016, Britain exited the Single market, giving back its seat in the European Parliament and all the benefits that came with it. How can financial markets affect economic performance?Demirg-Kunt and Levine in their 2001 book, Financial Structure and Economic Growth said there is a strong connection betw een financial markets development and economic growth. The way in which thishappens is that a well-functioning financial market will efficiently direct theflow of savings and investments in an economy as such to enable businesses toaccumulate capital and goods and services to be produced. A well-establishedfinancial market alongside a wide range of financial products will benefitborrowers and lenders and therefore the economy as a whole. Another benefit of an efficient financial market is that byproviding a range of financial options at varying risk levels and pricingstructures, borrowers and lenders can be closely matched for their individualneeds. This allows investors to determine and calculate their cost of financingby looking at their returns on their investments and then choosing the bestfinancing and investment choice for their requirements. The European Union created a single banking market with a singlecurrency and therefore created Europe-wide financial markets which madei nvesting and borrowing euro-denominated stocks, bonds and derivatives easy forall EU countries that are part of the Euro by eliminating exchange rate risks.By doing so, products and services that were previously only available on acountry by country basis were now available to a wider market, creating bettercompetition which in turn makes markets more efficient and prices lower forindividuals. This is called theSingle-Passport system, whereby any business set up in one-member state mayprovide its services to the rest without further authorisation requirements (European Commission 2016)Not only does euro-based financial marketsbenefit the Eurozone, it also attracts international investors to invest hereand benefit from the competitive market, (Mishkin, 2012)and by being part of the single-passport, Non-European companies can set uptheir head office in London, and have access to all the benefits of the SingleMarket. UK financial market relationship with the EUProfessor Nick Bloom of S tanford University said The single European market increased competition and forced British firms to increase the level of innovation.London is one of the biggest financial hubs ofthe world and hosts the largest number of banks and commercial insurancecompanies. According to (Belke A. etall) around 6 trillion euros, which is equivalent to 37% of Europesfinancial assets are managed in London, which is twice the amount of thenearest rival Paris. London also dominates Europes 5.2 trillion-euroinvestment banking industry. What this means is that major investmentshapping in some of Europes biggest cities are financed by companies operatingwithin London. Thisis why, (Mark Carney, Governor of the Bank of England), said Europe relies heavily on Londons debt and equity markets.When it comes to foreign exchange markets, theUK is way ahead of its European counterparts with an impressive almost 40% shareof the worlds foreign exchange and derivatives handling. According to the (City of London Co rporation) each year, $869 trillion worth ofEuro, Yen and Dollars are traded from London. This is higher than all theEuro-Zone countries combined. https//www.reuters.com/investigates/special-report/britain-europe-cost/Londoncurrently accounts for 70% of the Euro Sovereign debt trades, meaning that theEU countries cannot shut outlondons capital markets as this would be suicide. (Rueters)Accordingto Reuters (Kai Pfaffenbach) Frankfurtis desperately trying win over businesses to relocate to their city fromLondon. To help in this, the European Central Bank started the Capital MarketsUnion project in 2015, where they want Euro-zone financial markets to provideimproved fund raising for companies by replicating Britains financial servicesand become more efficient in the stocks, bonds and other securities markets. How Brexit is affecting Financial Marketshttps//www.ft.com/content/0260242c-370b-11e6-9a05-82a9b15a8ee7The question of how Brexit will affect the UK economy is very uncertain. The sterling fell to a 31 year low, stock markets fell and foreign direct investment has frozen. All these things point towards the short-term impact of Brexit to be very serious. The real question is, what will the long term effects be, and how will markets react to cope with such uncertainty about the future. Theinstitutional framework of the EU and the euro has created dependencies amongstcountries. For this reason, Brexit will have affects in not just UK financialmarkets, but financial markets across the globe. Accordingto (Gordon and Shapiro 1956) thedividend discount model, expectations about future effects on financial marketswill have an effect on stocks and other financial variables now. Fromthe graph above, we can see that when the news of Brexit was announced and theUK markets became uncertain about the UKs future in the single market, thepound fell to its lowest price in 31 years. Becauseof Brexit and Policy uncertainty, markets adopt a wait-and-see attitudetowards investme nt decisions. If London is nolonger part of the single market, it loses its attractiveness as a foreigndirect investment hub and a gateway to the European financial markets. According to thefinancial times, almost half of the FDI coming to the UK comes from the EU andafter Brexit, this investment will significantly decrease due to increasedtrade costs and tariffs. The Office of National Statistics (ONS) tells us thatFDI has been about 5% of UK GDP between 1999 and 2015. The analysis from thefinancial times estimates the decrease in FDI would be 22%.The impact of Brexiton the UK financial sector can be broken down in to 3 thingsWhat agreement can the UK make with the EU in its post-Brexitnegotiations. The extent to which financial sector businesses move theiroperations from the UK to a Eurozone country before any negotiation agreementsare made.How well the UK financial sector can survive based on its globalposition and relationship.Until a deal is madewith the EU, we cannot predict h ow the market will end up like, but we canhypothesise certain outcomes like the followingCurrently, the UK isstill part of the EU, and hence has passporting rights. Once these rights aregone, UK firms will have to have state level authorisations from EU countriesto perform activities. This will depend upon whether the regulators in thosecountries will allow UK financial markets to sill operate within their borders.The best outcome would be if the UK retains their passporting rights througheither a negotiation or remaining a part of the EEA. Johnathon fordwrites in the financial times that another option that UK based companies mayhave is to open up subsidiaries in different EU countries, that way giving themaccess to customers within those markets. This is however costly andinefficient. Alternatively, UK firms could take advantage of Third Country Regime (TCR) access provisions. What this means is that companies that were incorporated outside the EU can still do business on a cross- border basis if they wish to do so without having an establishment within that EU country, however EU law will require that the regulations and legal structure they follow complies with EU.Reuters business newstells us that Standard Chartered (Stan.L) and JPMorgan (JPM.N) were the latestglobal banks that have outlined plans for European operations after Brexit. Goldman Sachs LloydBlankfein said that Londons growth as a financial centre could stall as aresult of upheaval caused by Brexit. So,because of Brexit and the uncertainty of what the future holds for UKsfinancial markets UK based financial firms especially those in London arelooking to move their operations into the EU market to benefit from the singlemarket. Another financial market area that will be affected by Brexit isthat of selling of derivatives for companies to buy protection or lower theirrisk portfolio against changes the US dollar and or spikes in the price of oil.As a result of tighter financial regulations on bank s, some willopt out of providing this service and those who do will offer a littler varietyof products at a higher price. Ultimately, this is bad for markets as they arenot getting the best deal they can. London also dominates the euro derivatives market. EUpolicymakers have not liked this for a while and want to shift this to aEurozone country after Brexit. This will in turn increase the price of tradingfor corporations that deal in multiple currencies as they will have to go throughseveral clearing houses. Bankers are unsure how much extra it will cost a Europeancompany to borrow without direct access to London, however, the association forfinancial markets said customers are being overly optimistic if they think thatlending agents will bear the burden or grunt of this. They will push theincreased cost of borrowing onto the consumer, which will ultimately make themless competitive in the market. Ernst and Young say in their research paper that they surveyed major corporates includ ing Airbus and Volkswagen and found that these companies were really worried about rising costs of funding as a result of Brexit.London has dominated the financial centre for decades and hasbuilt its reputation on the service it provides. It would be very difficult toreplicate this market. This has been due to its vast talent pool, widespreaduse of the English language and the UK legal system and the vast amount ofmoney going through the UK through these financial markets. Anothergreat strength of the UK is its over-the-counter derivatives market.Corporations often use swaps to protect themselves against adverse interestrates and currency moves. Over-the-counter derivatives have to go throughclearing houses who are sort of the middle man who make sure neither partydefaults on their payments. Even though the UK is not part of the Euro singlecurrency, it still manages of all euro-denominated swaps. Asthe UK decides to leave the EU, this creates a problem, because now most ofthese swa ps wont be clearing through the bloc. Germany and France have alreadysaid that they want the euro-denominated derivatives to be cleat=red throughthe EU however LSE has argued that doing so would cost London thousands ofjobs. According to a private report by EY, this estimate loss of jobs could bearound 83,000 by 2024. TheEU needs Londons money, says Mark Carney, governor of the Bank of England. Hecalls Britain Europes investment banker and says half of all the debt andequity issued by the EU involves financial institutions in Britain.What impact would Brexit have on the way in which banks are regulated in the UK?There arethree pillars in the UK banking regulationsThe capitalrequirements directive IV and the capital requirements regulation.The banking act of2009 Bank Resolution andRecovery Directive (BRRD)Since theBRRD and CRD IV were EU legislations, the UK has to decide after Brexit howmuch they want to keep. CRD IV implements the requirements of Basel III, whichthe UK would still be committed to after Brexit. Brexit will likely have aneffect on the legislation application of the EEA branches and subsidiaries. Whatimpact would Brexit have on the UK insurance industry?The London market currently has access to over 500 million customersthrough the EU and a substantial amount of insurance and reinsurance isdistributed into and out of the UK. For the UK to continue to have access tothese customers, they have to negotiate bilateral treaties to ensure memberstates allow them passport into the EU. The prudential regulation authority (PRA) has been very involved innegotiating the solvency II directive which was based on the risk-based regimeof the UK. Whatimpact would Brexit have on the UK funds industry?Currentlymost UK based fund managers already use Irish or Luxembourg UCITS andalternative investment funds (AIF) platforms for Pan-European distribution offunds therefore Brexit will likely not have much effect on this sector of thefinancial market. Theproblem the UK asset management industry will face is the risk of changes torules enabling MIFID investment firms, AIFMS and UCITS management firms tochoose UK based investment managers. Currently, the administration is deemedsufficient for EU firms to contract asset management jobs to the UK managers.Another drawback may be that EU member states may put obstacles in front in theform of tax regimes that make it less attractive for EU firms to hire UKinvestment managers. Corporate taxTheEU previously set the legal requirements for corporate tax in the UK. Since wewill no longer be a part of the EU, these regulations will be revised by HMRCand new draft regulations will be put in place. Currently businesses that haveoffices within and outside the UK enjoy a 0% rate of withholding tax. This mayno longer be the case and companies will look for ways to save themselves fromvarying taxations in different countries, or changing their place of businessto protect themselves from higher or double taxation.V ATVAT was a European Union Concept and now that the UKgovernment is responsible for this, they may decide to change the rates atwhich this is charged or what products VAT will be charged on. Accounting lawAt the moment, there is a significant EU accounting and company law legislations that may come under review after Brexit. These include, directive 2013/34/EU about annual financial statements, consolidated financial statements and reports. Directive 2009/101/EC about the disclosure of company documents and company obligations. Directive 2012/30/EU on the formation of public limited companies. Directive 89/666/EEC on disclosure requirements for foreign branches of companies. Global Impact of BrexitThereis no roadmap to follow or analogy to invoke as a guide or pattern for how theBrexit vote will reverberate in the months and years to come. However, a fewimmediate consequences seem highly likelyTheflight to safety away from the epicenter of this British-EU divorce will pushcapital aw ay from the region and toward key safe-haven markets including theU.S.especially Treasuriesand to Japan. This will further lower marketinterest rates and raise relative currency values.Ahigher U.S. dollar and Japanese yen are negative to both economies exportsectors. In the case of Japan, this is particularly unhelpful to its efforts toreinflate and reinvigorate the economy after decades of deflation.Thehigher U.S. dollar also triggers additional pressure on China to float the yuanlower, as it is caught in the divergence between its two largest exportmarketsthe EU and the U.S..Forthe U.S., the negative impact on exports is relatively small compared withtrends in domestic demand, but the deflationary pressure on tradable goods willwiden the divergence between reasonably strong inflation in the services sectorvs. reasonably strong deflation in the goods sector.TheEuropean Central Bank will be compelled to raise its level of intervention yetagain, as risk premiums across the region ris e. Among the larger Eurozonemembers, Italy is in a particularly vulnerable positionnow made morevulnerable. Each blow to members of the Eurozone periphery also further makeGermanys outperformance in the Eurozone even more unsustainable.The nature of the UKs eventual exit agreement with the EU is crucial, and hangs over a multitude of markets. CEP BREXIT ANALYSIS Lifeafter Brexit What are the UKs options outside the European Union? It is highly uncertain what the UKs future would look like outside the European Union (EU), which makes Brexit a leap into the unknown. This report reviews the advantages and drawbacks of the most likely options. After Brexit, the EU would continue to be the worlds largest market and the UKs biggest trading partner. A key question is what would happen to the three million EU citizens living in the UK and the two million UK citizens living in the EU? There are economic benefits from European integration, but obtaining these benefits comes at the political c ost of giving up some sovereignty. Inside or outside the EU, this trade-off is inescapable. One option is doing a Norway and joining the European Economic Area. This would minimise the trade costs of Brexit, but it would mean paying about 83% as much into the EU budget as the UK currently does. It would also require keeping current EU regulations (without having a seat at the table when the rules are decided). Another option is doing a Switzerland and negotiating bilateral deals with the EU. Switzerland still faces regulation without representation and pays about 40% as much as the UK to be part of the single market in goods. But the Swiss have no agreement with the EU on free trade in services, an area where the UK is a major exporter. A further option is going it alone as a member of the World Trade Organization. This would give the UK more sovereignty at the price of less trade and a bigger fall in income, even if the UK were to abolish tariffs completely. Brexit would allow the UK to negotiate its own trade deals with non-EU countries. But as a small country, the UK would have less bargaining power than the EU. Canadas trade deals with the United States show that losing this bargaining power could be costly for the UK. To make an informed decision on the merits of leaving the EU, voters need to know more about what the UK government would do following Brexit. This is the first in a series of briefings analysing the economic costs and benefits of Brexit for the UK. Economists for Brexit A Critique Professor Patrick Minford, one of the Economists for Brexit, argues that leaving the European Union (EU) will raise the UKs welfare by 4% as a result of increased trade. His policy recommendation is that following a vote for Brexit, the UK should strike no new trade deals but instead unilaterally abolish all its import tariffs. Under this policy (Britain Alone), he describes his model as predicting the elimination of UK manufacturing and a big increase in wage ine quality. These outcomes may be hard to sell to UK citizens as a desirable political option. Our analysis of the Britain Alone policy predicts a 2.3% loss of welfare compared with staying in the EU. This is only 0.3 percentage points better than Brexit without unilaterally abolishing tariffs which would result in a 2.6% welfare loss. Minfords results stem from assuming that small changes in trade costs have tremendously large effects on trade volumes according to his model, the falls in tariffs become enormously magnified because each country purchases only from the lowest cost supplier. In reality, everyone does not simply buy from the cheapest supplier. Products are different when made by different countries and trade is affected by the distance between countries, their size, history and wealth (the gravity relationship). Trade costs are not just government-created trade barriers. Product differentiation and gravity is incorporated into modern trade models these predict that after Brexit the UK will continue to trade more with the EU than other countries as it remains our geographically closest neighbour. Consequently, we will be worse off because we will face higher trade costs with the EU. Minfords assumption that goods prices would fall by 10% comes from attributing all producer price differences between the EU and low-cost countries to EU trade barriers, ignoring differences in quality. Single Market rules (for example, over product safety) facilitate trade between EU members as it creates a level playing field. Minfords assumption that the Single Market merely diverts trade from non-EU countries is contradicted by the empirical evidence. Minford also overlooks the loss in services trade that would result from leaving the Single Market, such as passporting privileges in financial services. Minfords approach of ignoring empirical analysis of trade data seems predicated on the view that because statistical analysis is imperfect, it should all be completely ignored. But such statistical biases may reinforce rather than weaken the case for remaining in the EU. Theories need grounding in facts, not ideology. 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