What’s happening?

  • On 23 June, the United Kingdom is holding a referendum on withdrawing from the European Union. A vote to leave is forecast to have significant impacts on financial markets and participants in those markets on a global basis. These forecast impacts include short-term extreme volatility in global currency, equity and fixed income markets in the immediate aftermath of a vote to leave. Long term forecast impacts include destabilization of the EU as whole, significant impact on U.S./EU trade, and massive dislocations in the valuations of European banks and brokers, along with a range of other macroeconomic factors.

Why is this important?

  • The outcome is almost impossible to predict. Polling is consistently in the 46/44 remain/leave range, with the remaining 10 percent being “undecided.” Statisticians believe that the majority of the undecideds are more likely to vote to leave the EU. The timing of the vote also minimizes likely turnout amongst younger voters, who are more likely to remain.  In short, the markets are getting very worried.
  • International investors are already reducing their European exposures in anticipation of a vote to leave. Some are saying that significant market dislocation is occurring in traditionally liquid markets exposed to “Brexit risk.”
  • Some predictions suggest that a vote to leave would be the single most significant event in financial markets since the insolvency of Lehman Brothers in 2008, with potentially much broader long term ramifications for international trade. (For example, the euro and the pound would devalue, and there would be a flight to the U.S. dollar, leaving the Fed in a position where it may have to hold or cut rates, rather than raise as intended.)

What is the relevant law?

  • U.K. and EU constitutional rules deal with the process for Brexit. They are likely not fit for purpose if the relevant process is initiated.  The European treaties anticipate a two-year “notice period” in which a leaving member’s new relationship with the EU can be agreed.  It would be optimistic to believe that a comprehensive agreement could be reached within that time frame.
  • All significant U.K. legislation and rules relating to fund managers and funds are derived from EU rules. A vote to leave, or a disputed “close call” result, will likely disrupt these legislative frameworks significantly, both in the United Kingdom and more widely across the EU.