The outcome of last month’s EU referendum in the United Kingdom is, by now, well-known: in a 52-48 vote, the Brexit vote passed, prompting PM David Cameron to resign and raising serious questions about the economic future of the United Kingdom. The global financial market responded, predictably, with immediate volatility: the following day, the pound dropped by eight points to a low not seen since 1985, while UK financial stocks took a hard hit. For the European financial sector, the news of an impending Brexit compounded existing pessimism within the financial market that existed after years of dealing with the post-2008 economic climate.
Market uncertainty threatens to throw cold water on the the financial industry — especially in London, which has in recent years become the largest global hub of fintech firms. While severe short-term effects — such as a collapse of London’s financial market — are unlikely, the vote will inevitably have ramifications on the financial industry. “The financial center won’t die, but it will get weaker,” said John Cryan, CEO of Deutsche Bank. “Talk of big European and American banks quitting the City of London, which by many measures is the world’s largest financial hub, are exaggerated,” writes the New Yorker’s John Cassidy. “But there is no doubt that some jobs would be relocated to places like Dublin, Frankfurt, and Paris.”
While the long-term effects of the Brexit vote on the UK’s marketplace are as yet unclear, for the global fixed income capital market, the vote (and the resulting market volatility) are certainly creating some problems, especially in the new bond issuance space. Investors reeling from the Brexit vote are shifting their attention to more secure, lower-risk assets (namely, US treasuries and high-quality corporate bonds). Meanwhile, corporations still need to access debt capital markets in order to issue new bonds, even when markets are plagued by volatility.
In the current environment, technology that offers transparency and streamlined processes for new bond issuance allowing access to debt markets despite any Brexit-induced downturn or sustained volatility, could be greatly beneficial. Fintech companies that are built on the premises of reducing risk, increasing transparency, and bringing liquidity to the market — all responses that stand to improve competitiveness for market stakeholders — could provide a positive response to volatility. The market conditions due to Brexit vote in that regard create an opportunity for fintech firms to allow capital-raising issuers to be better aligned with all counterparts and access debt capital markets more efficiently.
More efficient market activity can be achieved by streamlining the bond issuance process and providing dealers, investors, and issuers access to more information. For a corporation needing access to capital right now, waiting until the implications of the vote become more clear is not an option. During periods of volatility, companies may value a more efficient and transparent mechanism through which to access capital. Digital fintech capabilities have the potential to ease market fears by reducing execution risk and providing more information, allowing issuers, dealers, and investors to build confidence.
Political decisions made in the days and weeks following the Brexit vote (by players on both sides of the issue) will have direct ramifications on debt capital markets. Whether or not the vote emboldens other such movements in Spain, Italy, and Greece remains to be seen, as does the future of the United Kingdom itself: Scotland and Northern Ireland have both hinted at referendum votes of their own, which would further reduce investor confidence in British markets and disrupt market momentum across the board. How will Mark Carney and the Bank of England respond to short-term volatility through interest rate and fiscal instruments? Perhaps the most crucial question, though, is whether the current climate of volatility will help or hamper the growth of fintech firms in financial markets. Challenging times may well prove to be an opportunity for any firms that can enable their clients to better navigate a volatile marketplace.
For fintech firms working in markets that may become more uncertain and challenging over the coming months and years, the opportunity to implement platforms and technologies that streamline market processes — and, crucially, to increase efficiency for issuers, dealers, and investors — will become present as the market regains its footing. The key point is that opportunity, in this case, is not one-sided: both fintech firms, as well as debt market participants, stand to gain a great deal by responding to the challenges posed by the Brexit vote with investment in, and embrace of, fintech innovation.
About Vuk Magdelinic:
Before founding Overbond, Vuk’s career spans over 10 years in capital markets and technology. As PwC Risk and Regulatory consulting manager Vuk led large digital transformation programs at Deutsche Bank and BNY Mellon in New York City. Prior to that he worked at CIBC Fixed Income trading floor in Toronto in structured products origination capacity. Vuk has collaborated on numerous publications addressing key trends in fintech innovation. Vuk holds electrical engineering degree from University of Toronto, MBA from Ivey school of business and is an avid abstract painter.
A very well written note. I see two separate issues here.
One is the inevitable, continued disaggregation of information and resources away from the sell side to the buy side, even in the form of primary issuance. This will continue regardless of what the eventual consequences of Brexit are. In fact, as you argue, the need for certainty and transparency will likely accelerate these changes if anything. Stakeholders come to rely on market innovation/fintech to secure access to needed resources, regardless of where they are housed.
The second is not a big one and that is the eventual diminishing of London as a financial center. As most know, this will be a very slow, long transformation. As an English speaking city, it is really hard to envision how London is supplanted by, say, Frankfurt or Paris. What it may evolve into is more of an Asian model where instead of one dominant city there will be three or so (like HK, Tokyo, Singapore) that have more specialized roles. But hard to see why London based fintech would not weather this slow motion evolution.