Watch Live: May And Juncker Make Joint Statement, But "No Deal Today"

With the Irish border issue reportedly resolved, and the Brexit process suddenly progressing unexpectedly smoothly, Theresa May and Jean-Claude Juncker are set to make a joint statement momentarily, however for those expecting a formal announcement of a deal, don"t hold your breath because as a BBC correspondent just announced:

• NO DEAL TODAY FROM BREXIT TALKS: BBC

The news sent the pound tumbling:

Live feed below:

And here are the highlights:

• EU"S JUNCKER: WE HAD A FRIENDLY MEETING WITH UK"S MAY


• EU"S JUNCKER SAYS IT WAS NOT POSSIBLE TO MAKE COMPLETE DEAL


• EU"S JUNCKER SAYS IT WILL REQUIRE FURTHER DISCUSSION


• EU"S JUNCKER SAYS WILL CONTINUE DISCUSSION WITH UK THIS WEEK


• EU"S JUNCKER SAYS CONFIDENT BREXIT PROGRESS POSSIBLE BY DEC. SUMMIT


• MAY SAYS HAD A CONSTRUCTIVE MEETING WITH THE EU


• MAY SAYS IT"S CLEAR EU, UK WANT TO MOVE FORWARD TOGETHER


• MAY SAYS WILL RECONVENE BEFORE THE END OF THE WEEK


• MAY SAYS SHE"S POSITIVE THEY WILL CONCLUDE THIS POSITIVELY

"No-One Knows What’s Going On Now": Britain, EU Fail To Reach Brexit Deal

There was a burst of hope this morning that after many repeated false starts, Theresa May and JC Juncker would finally announce a Brexit deal on Monday. Alas it was not meant to be and after a brief conference between the two leaders, we learned that despite progress, a Brexit deal "was not possible today."

According to the BBC"s Laura Kuenssberg, "it was the DUP call that sunk today"s chances of a deal - Foster held her press conf, 20 mins later May leaves talks with Juncker to call her, goes back into the room and the deal is off."

However it was another BBC reporter, Katya Adler, that had the best summary of today"s events: "No-one knows what’s going on now, one EU diplomat told me"

No-one knows what’s going on now, one EU diplomat told me #Brexit

— katya adler (@BBCkatyaadler) December 4, 2017

What we do know is that despite the lack of a deal, hope remains and speaking after talks between the UK and the European Commission’s negotiators, Jean-Claude Juncker said: “Despite our best effort and a significant effort, it was not possible to reach a complete agreement today” adding that "this is not a failure, this is the start of the very next round."

Juncker added that “we now have a common understanding on most relevant issues, with just two or three open for discussion. This will require further consultation, further negotiation and further discussion,” and that "we were narrowing our positions to a huge extent today thanks to the British prime minister, thanks to the willingness of the European Commission to have a fair deal with Britain."

In her first public press statement in Brussels alongside Juncker since the start of Brexit talks nine months ago, May chimed in: “I am confident we will conclude this positively" adding that “on a couple of issues, some issues remain which will require further negotiation and consultations. We will reconvene before the end of this week."

As reported earlier, talks had come unstuck over the Northern Irish border in recent weeks. Earlier in the day after government sources in Dublin said London had agreed to keep Northern Ireland “aligned” to EU regulations to avoid a “hard border” with the Irish Republic. Word of that sent the pound higher on hopes of rapid trade talks but according to Reuters, provoked an angry response from May’s allies in Northern Ireland, demanding equal treatment with the rest of the United Kingdom.

Underlining the conundrums of Brexit, the idea of Northern Ireland remaining closely linked to the EU single market prompted speculation that, to avoid new barriers between Belfast and London, the British mainland would have to follow suit.

The leaders of Scotland and London, which voted against Brexit, demanded they be allowed the same EU relationship as Northern Ireland. Yet May has ruled out such differentiated treatment or staying in a customs union or the single market.

* * *

So where do we stand after today"s chaos? Well, Juncker said that he is “very confident” the Brexit negotiations will achieve a breakthrough this week: “I’m very confident that we’ll reach an agreement in the course of this week,” the Commission president told reporters after his meeting with May.

“We now have a common understanding on most relevant issues, with just two or three open for discussion,” Juncker concluded.

The markets have taken Juncker"s optimism in stride: after sliding to day lows following news of the no deal, cable has recovered half the loss, and was last trading around 1.347.

UK Cabinet Poised To Increase Brexit Divorce Payment By Another 20 Billion Euros

Theresa’s May’s government is poised to concede an improved Brexit settlement offer to gain EU approval to move the negotiations on to the next stage.

May reportedly has the backing of senior ministers ahead of a critical cabinet meeting on Monday afternoon. The list of senior ministers is thought to include chancellor, Philip Hammond, Brexit secretary, David Davis, environment secretary, Michael Gove and weakened foreign secretary, Boris Johnson, who famously said in July that the EU could “go whistle” over a divorce settlement. Hammond said at the weekend “we’ve always been clear it won’t be easy to work out that number, but whatever is due, we will pay”. Press reports suggest that the UK will formally offer about 40 billion Euros, versus the previous 20 billion. The news caused Sterling to rise more than half a percent to a two and a half week high of 1.3272, its strongest level since 2 November 2017. According to Bloomberg.

The U.K. could be about to improve its financial offer to the European Union ahead of a crucial meeting of the bloc’s leaders in December. Members of Prime Minister Theresa May’s divided cabinet will consider Britain’s divorce from the EU at a meeting Monday afternoon of the Brexit sub-committee that could be key to unlocking the most controversial matter in the negotiations -- money. Britain is “on the brink of making some serious movement forward” and starting to break the “logjam,” Chancellor of the Exchequer Philip Hammond told the BBC on Sunday. While Hammond is among the most pro-European members of cabinet, his suggestion follows Brexit Secretary David Davis’s hint from Berlin on Friday that more details on a financial settlement would be presented within weeks. With businesses clamoring for clarity and the departure just 16 months away, pressure is mounting to break the impasse.

The impact of a 40 billion Euros settlement offer is hard to judge as it likely to fall short of the EU’s demands, while it might enrage a substantial proportion of the British public. Bloomberg continues.

The EU is pushing for Britain to pay at least 60 billion euros ($71 billion) to cover budgetary commitments and future liabilities such as pensions for EU civil servants. So far, May has said she will make 20 billion euros of budget payments after Brexit, and is going through the other items line by line. The Times said that while the government wouldn’t put a figure on it, it was likely to add another 20 billion euros to what it’s already agreed to. There’s a risk that might not be enough to unblock talks. It’s also unlikely to go down well domestically. “If we start saying that we’re going to give 40 to 50 billion to the EU, I think the public will go bananas, absolutely spare,” Robert Halfon, a Conservative lawmaker and former minister, said late Sunday in a BBC radio interview. “That is going to be very difficult if it is going to be that sum, amount of money.” Halfon has a point: one of the main messages of the pro-Brexit wing in last year’s referendum was that it would put an end to sending large sums of money to the EU, and polling shows the British public are adverse to paying a large exit bill. A YouGov poll in September found that even a bill of 20 billion pounds was unpalatable to 63 percent of voters surveyed.

Time is running out for the financial settlement to be agreed if it is to be approved at the next EU Council meeting in mid-December. After meeting Prime Minister May on Friday, EC President Tusk indicated that early December was the deadline. As Bloomberg explains.

“We are waiting for a substantial offer from the British,” Dutch Foreign Minister Halbe Zijlstra said on Monday.

 

“It has to be concrete and on the table instead of in the press”…

 

Time is pressing on Britain to come up with an improved offer after EU President Donald Tusk said early December would be “the latest” for additional concessions on the bill if talks are to advance beyond the divorce and on to future trading arrangements after a mid-December summit. “We will make our proposals to the European Union in time for the council. I am sure about that,” Hammond said in an interview with the BBC on Sunday. Asked if time was running out for the U.K. to make an improved offer on its exit payment, he replied that “the council is in three weeks, so, yes.”

With the deadline approaching, the posturing by both sides is ratcheting up and an agreement – or otherwise – will probably go down to the wire.

The process has been complicated along the way by what sometimes looks like a game of brinkmanship. In an interview with the BBC, Davis insisted that Britain has “made all the running” and that now “I want them to compromise,” meaning the EU. Tusk responded by saying he found that position laughable: “I really appreciate Mr. Davis’s English sense of humor.”

Another point is that success or failure could well be decided at the highest political levels and relatively last minute. In Berlin on Friday, Davis said “we’ll make some decisions, political decisions, later on.” The stalemate in Brexit talks is dragging on as EU leaders refuse to discuss a future trade deal with the U.K. until sufficient progress is made on money, guaranteeing rights of citizens, and the Irish border.

Ahead of today’s cabinet meeting, an MP from May’s party warned her not to “play Santa Claus” to the EU. As the BBC reports.

The UK government cannot afford to "play Santa Claus" to EU bosses by handing over billions of pounds, a Conservative MP says. Nigel Evans accused the EU of demanding "ransom money" from Theresa May to move Brexit negotiations forwards. He was speaking ahead of a meeting between Mrs May and senior ministers to try to make progress on the stalled talks.

This was May leaving church with her husband in a red coat on Sunday.

It’s been clear that EU bureaucrats were determined to extract the maximum possible settlement to punish the UK for leaving. However, the sudden weakening in Merkel’s position, after her failure to negotiate a new coalition government, might shake Brussels’ hardline approach enough to get a compromise deal over the finishing line.

We never fully bought into the “Merkel is May’s ally” narrative, but time will tell.

EU Uses Sleazy Negotiating Tactics To Extort More Cash In Brexit Talks

As we discussed (see here) when Brexit talks resumed this week, the EU is piling pressure on Theresa’s May’s weakened government to extort more money out of the UK in the divorce settlement – now termed “moment of clarification” in EU parlance. Despite rumours before the latest talks began, that Theresa May was prepared to increase the UK’s offer, if this was the case, the EU wasn’t impressed. In the post-talks press conference. the beleaguered Brexit Secretary, David Davis, stated that there is positive momentum in the negotiations…

There is no doubt that we have made, and continue to make significant progress across a whole range of issues. Across the board we made progress to resolving some really difficult questions. That, of course will continue, at pace, between now and December.

…and the markets seemed to believe him. Sterling caught a bid, although it probably had at least as much to do with stronger-than-expected industrial production and a narrowing in the UK’s trade deficit. Meanwhile, the EU side did its fearmongering best to give the impression that insufficient progress will be made to progress to trade talks when the European Council meets in December. Bloomberg reported on comments from EU chief negotiator, Michael Barnier.

European Union chief negotiator Michel Barnier raised the prospect of Brexit talks failing to reach a breakthrough by year-end, saying the U.K. has two weeks to come up with a better offer on the financial settlement.

 

Barnier called for “real and sincere progress” on the three divorce issues, which include the separation bill, the rights of EU citizens and the Irish border, which has erupted back onto the agenda this week.

 

“I have to present a sincere and real picture on those three subjects to the European Council and the European Parliament. If that is not the case, then we will continue, and that will put back the opening of discussions on the future,” Barnier said at a news conference in Brussels on Friday with Brexit Secretary David Davis. Little progress had been expected in this sixth round of talks, as the focus has been on whether a breakthrough will be possible by December.

Prior to the resumption of talks, Davis had toured of European capitals trying to drum up support for the UK’s position. One person he met was Poland’s European Affairs minister, Konrad Szymanski. Szymanski was the first person this morning (before Barnier) to highlight the prospect that talks to resolve the financial settlement (and the Irish border – see below) could drag on into March next year. From Bloomberg.

“I think a satisfactory deal will be reached at the very last minute,” Polish European Minister Konrad Szymanski, who met Davis this week in Warsaw, told reporters on Friday in Brussels. “It could be March but it would be better in December.”

If agreement was delayed to March 2018, Szymanski noted that it would be difficult to negotiate a trade deal before Britain is due to exit the EU in March 2019. While Davis referred to “a few outstanding, albeit important, issues”, thanks to the EU, this is no longer just about money. A new “spanner” was thrown into the works by the EU on Thursday night. This is the border agreement between the Republic and Northern Ireland after Brexit. Perhaps not fully appreciating the EU’s negotiating tactics, we sighed when we saw a Bloomberg headline (with our emphasis) “Irish Border Throws Unexpected Hurdle Into Brexit Talks”. From the article.

The future of the Irish border erupted unexpectedly into Brexit talks this week, as the European Union made new demands on Britain that risk distracting from efforts to reach a breakthrough by year-end. The EU circulated a document to diplomats that called for Northern Ireland to maintain the rules of the customs union and single market after Brexit. It says there must be no hard border on the island, meaning regulations have to be the same on each side of the line that will become the U.K.’s land frontier with the EU after Brexit.

 

The Irish issue, while one of the three divorce issues that need to be settled in the first phase of talks, had taken a back seat in recent months as the U.K. argued that it would be easier to find an agreement on the gnarly border issue once the future trading relationship was clear. Its re-emergence as an obstacle late Thursday distracted attention from what appeared to be some carefully choreographed efforts by the U.K. government to get euroskeptic critics onside as it prepares the ground for the concessions it may have to make to Europe in the next few weeks.

Late last week, Theresa May had set out the specific hour which the UK will leave the EU – 11pm GMT on 29 March 2019 – in an amendment to the EU Withdrawal Bill to please those “critics”. “There in black and white” she said, warning that she would not tolerate any attempts to block Brexit in parliament.

However, May’s attempts at “choreography” were overwhelmed by the EU’s machinations and, coincidentally (or not), comments from Lord Kerr hitting the media this morning. Lord Kerr, if you weren’t aware, is a cross-bench peer in the House of Lords who drafted Article 50, the formal procedure for leaving the EU. Kerr gave a speech in London today, leaked beforehand in the media, in which he stated that the UK electorate had been misled and the Brexit process could still be reversed. According to the BBC.

(Lord Kerr) will give a speech in London later in which he will say: "We can change our minds at any stage of the process. We are not required to withdraw just because Mrs May sent her letter (to Brussels). Actually, the country still has a free choice about whether to proceed. As new facts emerge, people are entitled to take a different view. And there"s nothing in Article 50 to stop them."

Lord Kerr, it happens, is a "big time" globalist, having been a former member of the Bilderberg Steering Committee, Executive Committee member of the Trilateral Commission and Ambassador and UK Permanent Representative to the European Union.

As Bloomberg noted, it’s virtually impossible for the UK to meet the EU’s latest demands on the Irish border, which was almost certainly the point.

The EU’s demands on Ireland in the memo are all but impossible for Britain, unless the whole U.K. stays in the customs union, which Prime Minister Theresa May has ruled out. Allowing Northern Ireland to stay in the customs union could mean putting a border between it and mainland Britain. That’s unthinkable for the U.K., and more so at a time when the Conservative government is propped up by the pro-U.K. Democratic Unionist Party from Northern Ireland. The DUP would quit before accepting a border in the Irish Sea.

 

“We recognize the solutions to the unique circumstances in Northern Ireland must respect the integrity of the EU single market and customs union,” Davis’s department said in response. “But they must also respect the integrity of the United Kingdom.”

 

…Ireland has consistently argued that the U.K. remaining in the customs union would be the easiest way to avoid a new border. But May insists Britain will leave as it can’t strike trade deals around the world otherwise -- a key part of the pro-Brexit narrative.

We assume that Theresa May, David Davis and their colleagues have grown wise to the EU’s sleazy negotiating tactics and leaks to German newspapers (after Juncker has dinner with May – twice so far). Nonetheless, the ministerial resignations, party infighting and complaints from banks and the business community about the lack of clarification on the details and a transitional period are making it increasingly difficult for the UK side. However, we suspect that if the UK offers something approaching 60 billion euros, rather than the 40 billion euros it wanted to pay, the Irish border issue and others will magically melt away. May and Davis might see this as a price worth paying to stop having to be nice to the likes of Juncker and Barnier. And...the UK won’t have to cough up when a large German, French or Italian bank requires bailing out.

UK Will Compromise On Divorce Bill To Accelerate Brexit Negotiations

At last, it seems like the deadlock in Brexit negotiations is over and, not surprisingly, it was the UK which blinked first.

According to Bloomberg, the U.K. signalled it is preparing to compromise in its stand-off with the European Union over the Brexit bill, with new talks scheduled next week in an effort to break the deadlock. The deal on the divorce terms will probably be better for the remaining 27 EU countries than for Britain on the financial settlement, Brexit Secretary David Davis said on Tuesday.

Speaking to the House of Lords European Select Committee, Davis stated:

“The withdrawal agreement, on balance, will probably favour the (European) Union in terms of things like money and so on,” Davis told lawmakers in London.

 

“Whereas the future relationship will favour both sides and will be important to both of us.”

We noted the almost casual referral to “money and so on” and, while Davis said that he was not going to put a “big offer” on the table, the Daily Express reported how Davis’s comments went down badly with Brexiteers...

His comments sparked uproar on social media, with users branding the Brexit Secretary’s negotiations a failure.

 

John Walters tweeted: “Why on earth would we pay more than legally required? Unless there is quid pro quo. If it favours EU then there should be no deal (& no money).” 

 

Nathan Oxley complained “David Davis couldn’t negotiate his way out of a cardboard box.”

Davis also told the House of Lords committee he would “listen carefully” to calls from MPs for the final deal to be approved by statute in Parliament. A UK compromise on the divorce settlement paves the way for progress in the Brexit negotiations to accelerate during the next round of talks. The U.K. government and the European Commission issued a statement that these will be held on 9-10 November 2017. As Bloomberg explains...

May’s team wants to start discussing the future trading relationship and a two-year transition phase before the end of the year but must first satisfy the EU that the U.K. will pay what the bloc thinks it owes when it leaves.

 

Davis’s comments are significant because negotiations have stalled in a disagreement over how much the U.K. should agree to pay. U.K. Prime Minister Theresa May’s government wanted to resume talks this week but the EU could not fit a new round of talks into its schedule, Davis said.

 

“We want to strategically accelerate the process,” he told the House of Lords EU committee. “We are not holding up the process.”

There are signs that both parties sense that progress has been made. Here is Bloomberg on the EU’s position. 

Davis’s comments to lawmakers on Tuesday came after the EU’s chief Brexit negotiator, Michel Barnier, said he’s ready to step up the pace as the window of opportunity for trade talks this year closes...

“I’m ready to speed up negotiations,” Barnier told reporters in the Slovak capital Bratislava on Tuesday.

 

“We have proposed three dates, three weeks of new rounds of negotiations. In the next few hours or days, we’re working with the British delegation to find the right dates.”

Almost two weeks after German Chancellor Angela Merkel’s warm words at an October summit, concern was mounting that no date had been fixed for policy negotiations to resume, with confusion on both sides as to where the other stands and contingency planning well underway.

Relying on anonymous sources from both sides, there has been speculation that the UK was prepared to pay about 40 billion euros, while the EU was demanding about 60 billion euros. So, we have to assume the range has closed up into the 50-60 billion euros area.

Presumably, the odious John Claude Juncker will be happy.

Ray Dalio Is Shorting The Entire EU

Authored by Raul Ilargi Meijer via The Automatic Earth blog,

A point BOE Governor Mark Carney made recently may be the biggest cog in the European Union’s wheel (or is it second biggest? Read on). That is, derivatives clearing. It’s one of the few areas where Brussels stands to lose much more than London, but it’s a big one. And Carney puts a giant question mark behind the EU’s preparedness.

Carney Reveals Europe’s Potential Achilles Heel in Brexit Talks

Carney explained why Europe’s financial sector is more at risk than the UK from a “hard” or “no-deal” Brexit. [..] When asked does the European Council “get it” in terms of potential shocks to financial stability, Carney diplomatically commented that “a learning process is underway.” Having sounded alarm bells about clearing in his last Mansion House speech, he noted “These costs of fragmenting clearing, particularly clearing of interest rate swaps, would be born principally by the European real economy and they are considerable.”

Calling into question the continuity of tens of thousands of derivative contracts , he stated that it was “pretty clear they will no longer be valid”, that this “could only be solved by both sides” and has been “underappreciated” by Europe . Carney had a snipe at Europe for its lack of preparation “We are prepared as we should be for the possibility of a hard exit without any transition…there has been much less of that done in the European Union.”

In Carneys view “It’s in the interest of the EU 27 to have a transition agreement. Also, in my judgement given the scale of the issues as they affect the EU 27, that there will ultimately be a transition agreement. There is a very limited amount of time between now and the end of March 2019 to transition large, complex institutions and activities…

If one thinks about the implementation of Basel III, we are alone in the current members of the EU in having extensive experience of managing the transition for individual firms of various derivative and risk activities from one jurisdiction back into the UK. That tends to take 2-4 years. Depending on the agreement, we are talking about a substantial amount of activity.” [..] “I wouldn’t want to use financial stability issues as leverage. I wouldn’t want them to be addressed in a bloodless technocratic way in the interests of all the citizens.”

Sounds like Carney knows a thing or two that Juncker et al haven’t sufficiently thought through. The EU plans to move all – or most- derivatives clearing to the continent, but such a thing is anything but easy. That’s another very tangled web, and an expensive one to boot. Brussels probably wants to use the issue to put pressure on London in some way, but a hard Brexit might make that unlikely if not worse. Bloomberg from June this year:

EU Targets Derivative-Clearing Giants With Relocation Threat

“Today, a significant amount of financial instruments denominated in the currencies of the member states are cleared by recognized third-country CCPs,” according to the proposal. “For example, the notional amount outstanding at Chicago Mercantile Exchange in the U.S. is €1.8 trillion for euro-denominated interest-rate derivatives,” the commission said. “This also raises a series of concerns.”

The financial industry has lobbied hard against a location policy. The International Swaps and Derivatives Association said requiring euro-denominated interest-rate derivatives to be cleared by an EU-based clearinghouse would boost initial margin requirements by as much as 20% . The FIA, a trade organization for the futures, options and centrally cleared derivatives markets, has said forced relocation “could nearly double margin requirements from $83 billion to $160 billion.”

According to that Bloomberg piece, the notional amount outstanding of euro-denominated OTC interest-rate derivatives is some $90 trillion, 97% of which goes through the London Clearing House (LCH) based in .. well, you guessed it. Wikipedia:

LCH is a European-based independent clearing house that serves major international exchanges, as well as a range of OTC markets. Based on 2012 figures LCH cleared approximately 50% of the global interest rate swap market, and is the second largest clearer of bonds and repos in the world , providing services across 13 government debt markets.

In addition, LCH clears a broad range of asset classes including: commodities, securities, exchange traded derivatives, credit default swaps, energy contracts, freight derivatives, interest rate swaps, foreign exchange and Euro and Sterling denominated bonds and repos. LCH’s members comprise a large number of the major financial groups including almost all of the major investment banks, broker dealers and international commodity houses.

More details from Reuters, also in June:

Derivatives Body Warns EU Against Moving Euro Clearing From London

Shifting clearing of euro-denominated derivatives from London to the European continent would require banks to set aside far more cash to insure trades against defaults, a cost that would be passed on to companies, a global derivatives industry body says. [..]The London Stock Exchange’s subsidiary LCH currently clears the bulk of euro-denominated swaps, a derivative contract that helps companies guard against unexpected moves in interest rates or currencies.

Britain, however, is due to leave the bloc in 2019, putting it out of the EU’s regulatory reach. The International Swaps and Derivatives Association (ISDA), one of the world’s top derivatives industry bodies, said on Monday that a “relocation” in euro clearing to continental Europe would split liquidity in markets and reduce the ability of banks to save on margin by offsetting positions in the same liquidity pool.

Deutsche Bank has the world’s largest derivatives portfolio. Not all of it will be euro-denominated, but still. And I know it’s just notional amounts, but derivatives are not things one plays fast and loose with, lest the clearing becomes opaque and trouble starts.

Juncker better solve this thing. Oh, and this one too (yes, it’s quite fun to report on this):

Money Will Divide Europe After Brexit

As part of the transition period of around two years that she called for in her emollient Florence speech last month, Britain would continue to pay in to the EU budget to ensure that none of the member states was out of pocket owing to the decision to leave. These net payments of around €10 billion a year would fix the immediate problem facing the EU, the hole that would otherwise open up in its finances during the final two years of its current budgetary framework, which runs from 2014 to 2020.

[..] through its accounting procedures, the EU can and does commit it to spending that will be paid for by future receipts from the member states. What this means is that even after 2020 there will still be payments due on commitments made under the current seven-year spending plan. That pile of unpaid bills, eloquently called the “reste à liquider” (the amount yet to be settled), is forecast to be €254 billion at the end of 2020.

Estimates of what Britain might owe towards this vary, but taking into account what might have been spent on British projects it could be around €20 billion. On top of that – and the second main reason why the EU is holding out for more – the EU has liabilities, notably arising from the unfunded retirement benefits of European staff estimated at €67 billion at the end of 2016, which it is expecting Britain to share. Even taking into account some potential offsets from its share of assets, Britain may face a bill of between €30 billion and €40 billion on top of the €20 billion paid during the transition period.

The EU finances itself on the fly. It’ll have a €254 pile of unpaid bills in 3 years time. That is scary. Not for Brussels, but for its member countries. A hard Brexit, in which Britain may refuse to pay, is perhaps even scarier.

Anyway, once Juncker’s done with all that, he’ll have to move on to the next problem.

Derivatives is a big cloud hanging over Europe, but this one is potentially shattering.

Ray Dalio, manager of the world’s biggest hedge fund, is shorting, placing large bets against, anything Italian, and given Italy’s size and hence importance to the EU, his bets are effectively bets against Brussels.

Dalio’s Fund Opens $300 Million Bet Against Italian Energy Firm

Bridgewater Associates is adding to its billion-dollar short against the Italian economy. The world’s largest hedge fund disclosed a $300 million bet against Eni SpA, Italy’s oil and gas giant, data compiled by Bloomberg show. Bloomberg previously reported that Ray Dalio’s firm had wagered more than $1.1 billion against shares of six Italian financial institutions and two other companies.

This latest bet is the hedge fund’s second-largest against an Italian company, trailing only the $310 million against Enel SpA, the country’s largest utility. Eni’s majority holder is the Italian government via state lender Cassa Depositi e Prestiti SpA and the Ministry of Economy. The public involvement also is reflected in the government’s role in appointing the chief executive officer. Current CEO Claudio Descalzi has been at the helm since 2014 and was reconfirmed this year.

$1.1 billion against the banking system, $310 million against the main utility, $140 million vs pan-European insurer Generali and now $300 million vs the national oil and gas company, That adds up to quite a bit more than the Bloomberg graph says, but I’ll include it anyway.

Dalio doesn’t call the bluff of Italy, and this is not just like George Soros’ shorting the British pound in 1992, he’s calling out the entire EU and its financial system.

He’s saying I don’t believe you can keep up the charade.

He’s making a mockery of Mario Draghi’s “whatever it takes”.

So what are Rome, Brussels and Frankfurt going to do? They can’t ignore the no. 1 hedge fund forever. They will have to pump money into Italy, in large amounts. Merkel won’t like that, neither will her new coalition partner FDP, and the Bundesbank may start legal action.

Dalio’s located the Union’s achilles heel, which is not just that Italy’s insolvent (it’s not alone in that), but that there’s a gigantic theater production being performed to give everyone the impression that things are going just swimmingly, thank you. So Dalio’s said: how much for a ticket to the show?, and paid it. And now he’s inside.

Bridgewater didn’t enter that theater for nothing. $1.85 billion is not chump change for them. Intesa Sanpaolo CEO Carlo Messina may have said that Dalio will lose his bets, but according to the IMF Italy’s non-performing loans levels were €356 billion at the end of June 2016, which is 18% of total loans for Italian banks, 20% of Italy’s GDP and one-third of total Eurozone NPLs. Intesa Sanpaolo holds a nice chunk of that.

‘Whatever it takes’ may well be too much to take for the EU, and Draghi looks outsmarted, as do Juncker and Merkel. How many billions will it take for Dalio to go away? And then, who’s next, which hedge fund, which politician, which ECB chief? Coming soon to a theater near you.

Carney Reveals Europe's Potential Achilles Heel in Brexit Talks

This morning, BoE Governor Mark Carney discussed the risks of a hard Brexit during his testimony to the UK Parliamentary Treasury Committee. There was renewed weakness in Sterling during his testimony.

Ironically, given the fall in Sterling, Carney explained why Europe’s financial sector is more at risk than the UK from a “hard” or “no-deal” Brexit. We wonder whether Juncker and Barnier appreciate the threat that a “no-deal” Brexit poses for the EU’s already fragile financial system?

When asked does the European Council “get it” in terms of potential shocks to financial stability, Carney diplomatically commented that “a learning process is underway.” Having sounded alarm bells about clearing in his last Mansion House speech, he noted “These costs of fragmenting clearing, particularly clearing of interest rate swaps, would be born principally by the European real economy and they are considerable.”

Calling into question the continuity of tens of thousands of derivative contracts, he stated that it was “pretty clear they will no longer be valid”, that this “could only be solved by both sides” and has been “underappreciated” by Europe. Moving on to the possibility that there might not be a transition period, Carney had a snipe at Europe for its lack of preparation “We are prepared as we should be for the possibility of a hard exit without any transition…there has been much less of that done in the European Union.”

Maybe it’s Europe, not the UK, that needs the transition period most.

In Carneys view “It’s in the interest of the EU 27 to have a transition agreement. Also, in my judgement given the scale of the issues as they affect the EU 27, that there will ultimately be a transition agreement. There is a very limited amount of time between now and the end of March 2019 to transition large, complex institutions and activities…If one thinks about the implementation of Basel III, we are alone in the current members of the EU in having extensive experience of managing the transition for individual firms of various derivative and risk activities from one jurisdiction back into the UK. That tends to take 2-4 years. Depending on the agreement, we are talking about a substantial amount of activity.”

Returning to the theme of financial stability, he stated “As a general thing, in an uncooperative outcome, at least initially, the UK will be long financial services. We will have more capacity, capital, individuals, collateral in the UK. The EU will be short of financial services because not all of that capacity will be able to go across. The entire economic impacts are greater for the UK but, from a financial stability perspective, they are greater for the EU.”

On further questioning, Carney outlined the other two major issues, along with derivatives and wholesale banking, which would be affected, i.e. cross-border provision of insurance (UK domiciled entities would be unable to pay out) and data protection and transfer (there is more data in the UK which is relevant to the EU than vice versa).

Summing up, Carney stated “These issues are bigger for Europe than they are for us, but they’re material for us.” That comment prompted the following question “In which case we have much more leverage in order to get a deal?” The diplomatic reply was “I wouldn’t want to use financial stability issues as leverage. I wouldn’t want them to be addressed in a bloodless technocratic way in the interests of all the citizens.” Didn’t he just describe Juncker’s modus operandi.

Key Events And FX Week Ahead: Central Banks Send Markets Into A Coma, Someone Say Something New Please!

European politics returns with a bang this week, when not only will attention be focused on Austria to see if the right wing Freedom Party joins the People"s Party in a historic governing coalition, in an embarrassing blow to Europe"s establishment, but also whether Catalan President Puidgemont will (again) fomally - and this time clearly - announce whether he has declared independence as Spain"s PM Rajoy demanded last week. Elsewhere, EU leaders meet on Thursday to discuss the progress of the Brexit talks and whether transition and trade negotiations can begin. The official declaration seems highly unlikely to declare that ‘sufficient’ progress has been made, but there are some signs that EU leaders will agree to at least internal discussions on the terms required to agree a transition arrangement. Traders and European leaders will also have an eye on the Czech election (Friday and 21 October), where with signs that the enthusiasm for Western Europe is waning in some of the post-Soviet states, Russophile Andrej Babïs is expected to form the next government, putting more grit into the anti-EU machine.

In Asia, eyes will be on Japan"s snap election next Sunday, where according to a Mainichi report, the eRuling Liberal Democratic Party could win between 281 to 303 seats vs. 284 it holds now according to an Oct. 13-15 poll. LDP coalition partner Komeito could win 30-33 seats vs. 35 seats currently held. LDP-Komeito coalition set to surpass 2/3 lower house majority of 310 seats. Yuriko Koike’s Party of Hope may win between 42 to 54 seats; Constitutional Democratic Party of Japan 45-49 seats.

Economic data includes revised European inflation data (Tuesday), the ZEW survey (Tuesday) which is expected to show an increase, and German PPI (Friday) which consensus predicts will hit 2.9% YoY. In the US, we get industrial production and capacity utilization (Tuesday) which are expected to show a pick-up in September, but housing data: permits (Wednesday), starts (Wednesday) and sales (Friday) may show a hurricane-related decrease.

The 19th Chinese Communist Party Congress is the Asian set piece event of the week on Wednesday (see our preview here), and it builds to the appointment of the Central Committee and the Politburo Standing Committee on 24 October. The vast majority of commentators expect further consolidation of control by President Xi, and all the important decisions seem likely to have been made already. However, the names that are selected will give an insight to the direction of Chinese economic and foreign policy over the next five years. Consensus is that social financing, money supply data (early in the week) and GDP (Thursday) will show continuing strength in the economy (accompanied by the usual fretting as to whether such a high pace of credit growth can be continued indefinitely).

Following this week’s taster, earnings season gets into full swing next week. After some banks struggled despite earnings being in line with or even exceeding expectations, attention will turn to companies meeting (or missing) targets in the week ahead.

A full breakdown of the week"s events in the table below, courtesy of ING:

With the key events out of the way, here are the main catalyst FX traders will be focusing on, courtesy of Shant Movsesian and Rajan Dhall MSTA of fxdailyterminal.com.

FX Week Ahead - Central banks speakers send markets into a coma . . . someone say something new please!

The past week has seen the speaker schedule littered with the familiar names from the Fed and the ECB spouting the same concerns as they do week in, week out; inflation, wage growth, gradual expansion, policy needs to stay accommodative etc etc.  Much, if not all of the rhetoric is ingrained in the market and now to the point where we really to do need to see some evidence (one way or the other) on which way the economic momentum is building up in order to get some differentiation among the major currencies - interest rate spreads aren"t moving. 

After Friday"s CPI data out of the US, we saw the USD duly taking a hit - all on the miss on expectations, which saw the core unchanged at 1.7%.  The headline rate rose through 2.0% on oil price and no doubt the squeeze on agricultural products affected by the extreme weather conditions, and was explained away to see the greenback down on the week.  Given the corrective nature of the USD gains seen of late, there will be plenty of sellers out there waiting for the opportunity to get in on the longer term trend of weakness, but looking across the board, we can only see this justified to any degree against the JPY. 

If we look at the relative levels in USD/JPY compared to long end rates, 110.00-114.00 looks about right, but if one believes the benchmark 10yr Note tests back to 2.50%, then we can naturally expect a move to the upper end of the range, safe in the knowledge that major risk events (North Korea, US debt ceiling, etc) all have temporary negative effects on unrelenting risk appetite, with US equities in particular pushing up to ever new highs.  Beyond 114.00 will take a significant amount of policy reform from president Trump"s administration, and with market positioning heavily against the JPY, 115.00+ will be a mountain to climb at best.

Factor in the gradual improvement in the Japanese economy, and I maintain that it may soon be time to look upon the JPY on its own merits rather than just a safe haven (a safe haven for Japanese investors only).  Data here next week offers up industrial production and trade data in the early half of the week - Japanese stocks look good value in a sea of ballooning valuations. 

There is very little out of the US to get excited about, with capacity utilisation and production numbers here also, but which have tended to have little impact on the USD as the market obsesses over inflation.  Wage growth I can understand, but last month"s data was hampered by Hurricane season so we have to wait on that one.  

More Fed speakers on the schedule, but literally, how much more can they say that we don"t already realise for ourselves?  Expect more backtracking along the way; that seems par for the course, with Atlanta"s Bostic now umming and arring over whether Dec is a done deal in comments on Friday - the week before he seemed in line with adding another 25bps.  Yellen, George and Rosengren are all happy to commit to another hike this year, but Evans is sitting on the fence again and Kaplan is only whisker away from joining Kashkari in a somewhat discredited uber dove camp.  

However, it is at the BoE where the credibility stakes are really running high, and there is much at risk ahead with inflation, employment and retail sales stats all down on the slate for consideration.  That said, the MPC have pretty much nailed on a move in Nov, though they continue to draw the ire from a number of quarters - the British Chamber of Commerce the latest to question their change in stance.  Among the comments made by Gov Carney last week, one caught my attention; that of policy change not being automatic.  My mind swiftly harked back to the Aug meeting when "the bank" near immediately cut 25bps to stem the negative tide from the Brexit vote and there were plenty of us who saw this as unnecessary and quite frankly pointless, given the magnitude of consequences that we (the UK) now potentially face in severing membership with the union. 

Brexit talks are clearly not progressing - the notion of soft or hard Brexit has always put wry smile on my face, as there is only hard Brexit to look to no matter how the UK approach the negotiations.  If Theresa May and parliament roll over and pay the settlement asked of them in order to progress to the next round of talks on trade, then we can use the word soft in this instance, but otherwise, the EU are not going to give up much ground.  Reports that a 2yr transitional deal is already being discussed has given some hope to GBP bulls, but to think this won"t come at a significant cost is blind optimism over reality. 

Even so, there is potential for a Cable push higher this week, but we would not expect this to extend very far.  1.3500 would be impressive, but so will the selling interest waiting up a these levels.  We saw how short lived the moves were above 1.3600, so I cannot see past a very hard fought up-turn under the circumstances and this will come from the algo driven moves on soundbites and off-the-cuff comments.  

EUR/GBP is a little more difficult to gauge given politics has reared its ugly head with Spain and Catalonia drawing up battle-lines.  As if the hung parliament in Germany wasn"t enough to prompt some caution in the positive longer term outlook on Europe, this latest development brings the unity factor back into question - indeed, will it ever go away? 

This does not seem to stop the demand for EUR/USD however, but that was in and around 1.1700.  Nearing 1.1900, the price action has not been so confident and with good reason.  Net (EUR) longs are high, and have increased again according to the snapshot CFTC data, but were it not for the miss on US data on Friday, the resilience to the downside would have been seriously tested.  We feel it still will, and when the market is finally underwhelmed by the level of QE tapering due to be announced in a few week"s time, the 1.1660 level will likely come under pressure again as rate differnentials eat into longs.  

ECB speakers aplenty also, but data wise, CPI on Tuesday is the focal point here.  No one is doubting the economic expansion under way - but from a very low base it has to be said, but the pace of EUR gains this year has been meteoric, and one which has not followed core yields - 10yr Bunds still fluctuating inside 40-45bps.  A large element of safe haven demand has to be factored in here, but if this is the case, then we also have to start considering when Germany will argue more aggressively to firmer policy tightening to rein in on national inflation.  One policy does not fit all - many said it before and will say it again.  The EUR does not feel like such a one way ticket now!

Interest in the AUD, has been pretty tame of late, lagging a little in the early part of last week, but coming back with a little more force as a result of the sag in the USD.  Domestically, the RBA minutes are expected to reflect the cautious rhetoric of Gov Lowe, but employment has been one of their concerns, and we get the Sep data out on Wednesday.  0.7730 was a level we were watching and which held well, but on the upside, traders will fade this through 0.7900 unless we get some clear evidence that wages will push through on spending and inflation thereon. 

China"s GDP stats couls also impact to a degree this, but the much lower than expected trade surplus did not seem to unnerve the market given demand for raw materials out of Australia - fact not opinion.  

In NZ, we are supposed to find out which way the NZ First party will go to form government on Monday.  The end of (last) week NZD move higher was somewhat presumptuous, with plenty of reasons to believe that Labour could win out given policy overlap between the 2 parties.  The start of the week also releases Q3 inflation, where the year on year rate is expected to rise from 1.7% to 1.8%.  A combination of the above results could see us testing back towards and through 0.7050, but higher up, we will struggle much past 0.7300-25 while the USD decides what to do.  AUD/NZD is right in the middle of the 1.0825-1.1150 range which has held since late Aug, and should maintain these limits for the time being despite the near term risks mentioned above.

For Canada, next Friday"s inflation report is one to watch, though on Monday we also get the BoC business outlook survey.  Since the strong Q1 and Q2 GDP results  and rate hikes in response, we have seen some mixed jobs data, while growth over Jul was flat.  The central bank have quietly signalled their monitoring of mid-long end rates, just as they have on the currency, and it has been pretty orderly since then, with a propensity to err on the upside given the domestic stats so far.  The market here is still net long CAD, but this may start to neutralise a little should the prospects for a return to 1.2000 fade.  NAFTA negotiations under way are not proving harmful, nor we feel with they, with Trump and Trudeau sharing constructive and amiable talks in the meantime.  Oil prices are holding up well to offer healthier margins for most oil producers - Canada comfortable with WTI at $40-60 we are told.  

All pretty quiet in the Scandies this week with only Norwegian trade and Swedish employment to look to  All we need to do here is monitor a NOK/SEK rate stuck in a range and back on a 1.0200 handle since. When that breaks out, we will start looking into these pairs with a little more detail, but little to differentiate here at this point. 

Nigel Farage: "This Is The Clearest Proof Yet That The Great Brexit Betrayal Is Under Way"

Authored by Nigel Farage, originally published in the Telegraph

Theresa May is now the EU"s Stepford Wife: subservient and submissive to their every whim

So there we have it. Theresa May does not believe in Brexit. In an interview with Iain Dale on LBC, she completely collapsed, proving incapable of answering the question of how would she vote if there was a referendum now. She simply would not answer if she would support Leave.

Everyone listening to that interview knows that the reality is that May is still a Remainer. I don’t believe it’s possible to carry out this great, historic change against a huge amount of international criticism unless you truly believe in it. Nor, as it happens, does May: in a speech on June 1 she herself said: “To deliver Brexit you have to believe it”. This is the clearest proof yet that the Great Brexit Betrayal is under way.

It is only the latest piece of evidence in a whole procession. On Monday we also found out that Boris Johnson – supposedly Brexit"s loudest cheerleader in the Cabinet – has bottled it. Last month the Foreign Secretary stated in print his demand that the UK must leave the wretched European Court of Justice (ECJ) on Day One of our exit from the EU in March 2019. But then folded like a cheap suit by backing to the hilt Theresa May’s House of Commons Brexit statement – a speech which was itself further confirmation of the great betrayal.

This came to light in her answer to the rapier-like question from Jacob Rees-Mogg MP, in which she said that the UK will still be bound by ECJ rulings during the Brexit transition period, Jacob looked somewhat deflated by this answer. She also would not deny that any new EU laws would be applicable to us, simply trying to ignore the question by saying it was ‘highly unlikely’ this this would occur.

During her parliamentary address, May admitted to MPs that Britain will still be bound by the ECJ’s rulings during the Brexit transition period, currently set to end in 2021. Not only that, but she suggested this country will also have to accept any new EU laws which are dreamt up in Brussels during this time. 

In her world, this arrangement represents part of a “smooth and orderly process of withdrawal, with minimum disruption”.

To me, this demonstrates that May has become the Stepford Wife of the EU – conformist, subservient, submissive. It is woeful stuff.

The only good news of the day is that, at last, some contingency plans have been prepared for a no deal outcome. The only trouble is I simply do not believe that May has the courage to opt for this.

Depressingly, another supposed Brexiteer in the Cabinet, Environment Secretary Michael Gove, joined Johnson, hailing May’s “strong statement” in the Commons. To him, it was as though she had just made some important breakthrough for the good of mankind when all she had done was roll over and surrender for even longer our courts and laws to a distant power.

I realise that Johnson and Gove have assumed this new anything-goes position because they want to publicly support their troubled party leader at a difficult time and, by extension, remain in government for as long as possible. Anything to keep Jeremy Corbyn out of Downing Street is the mantra.

But is there not something utterly shameless about their acquiescence? Indeed, does anyone seriously believe either man actually welcomes our remaining under the ECJ for the foreseeable future?

By putting themselves and, let’s face it, their careers first, Johnson and Gove have made clear that they have no serious interest in carrying out the will of the 17.4 million people who last year voted to leave the EU. To them, the lives of the citizens are secondary.

Boris is right https://t.co/UFK4BqGVW0

— Michael Gove (@michaelgove) October 9, 2017

In backing a proposition they don’t even agree with, they have done little more than make themselves look foolish and mocked the notion that we are an independent state.

What their actions show is that this is fast becoming Brexit in name only and, as I’ve written before, it should concern everybody that our politicians are caving in at the very time they should be standing firm.

What sort of message does it send to potential trading partners in the world that Britain is still bowing and scraping to the institution which in June 2016 we very publicly dumped?

Countries outside the EU will regard us as flaky, a shadow of ourselves, perhaps even untrustworthy. At the same time, some within the EU will smell blood, and will use our confused domestic political situation to punish us as they see fit. It is lose-lose.

With every week that passes we see May and her government dither and delay over one issue or another, and it is this sense that she is being worn down by her opponents in the EU that I find truly alarming. The fight appears to have gone out of her at the time we need it most. I wrote last month of May’s naivety in thinking that the EU even wants to do a deal with Britain. It is blatantly obvious they don’t, and that she should call their bluff and walk away. The time for appeasing Messrs Juncker, Barnier and Verhofstadt is over.

Yesterday, Theresa May became Theresa Maybe in that she left open the door to further concessions. Once again I find myself wondering whether, 16 months after we voted to do so, we have the leaders to complete the job.

European Commission Responds To Theresa May Speech

As promised, the European Commission responded promptly to Theresa May"s speech with remarks from Michel Barnier hitting the tape, in which he says that "Prime Minister Theresa May has expressed a constructive spirit which is also the spirit of the European Union during this unique negotiation" and notes that "Today, for the first time, the United Kingdom government has requested to continue to benefit from access to the Single Market, on current terms, and to continue to benefit from existing cooperation in security. This is for a limited period of up to two years, beyond its withdrawal date, and therefore beyond its departure from the EU institutions."

Commenting further, Barnier said that "if the European Union so wishes, this new request could be taken into account by the EU and examined in light of the European Council stated in its guidelines of 29 April 2017: "Should a time-limited prolongation of Union acquis be considered, this would require existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures to apply."

While the remarks are hardly surprising, the one section that appears to be grabbing attention is the following: "The fact that the government of the United Kingdom recognises that leaving the European Union means that it cannot keep all the benefits of membership with fewer obligations than the other Member States is welcome. In any case, the future relationship will need to be based on a balance of rights and obligations. It will need to respect the integrity of the Union"s legal order and the autonomy of its decision-making."

He also said that "Prime Minister May"s statements are a step forward but they must now be translated into a precise negotiating position of the UK government" and adds that "The EU will continue to insist on sufficient progress in the key areas of the orderly withdrawal of the United Kingdom before opening discussions on the future relationship. Agreeing on the essential principles in these areas will create the trust that is needed for us to build a future relationship together."

Indeed, this is what will be the focus of the Brexit process as it moves on to the next phase of the "divorce" proceedings.

Full Barnier statement below (link).

European Commission - Statement

Statement by Michel Barnier

Brussels, 22 September 2017

In her speech in Florence, Prime Minister Theresa May has expressed a constructive spirit which is also the spirit of the European Union during this unique negotiation.

The speech shows a willingness to move forward, as time is of the essence. We need to reach an agreement by autumn 2018 on the conditions of the United Kingdom"s orderly withdrawal from the European Union. The UK will become a third country on 30 March 2019.

Our priority is to protect the rights of citizens. EU27 citizens in the United Kingdom must have the same rights as British citizens today in the European Union. These rights must be implemented effectively and safeguarded in the same way in the United Kingdom as in the European Union, as recalled by the European Council and European Parliament. Prime Minister May"s statements are a step forward but they must now be translated into a precise negotiating position of the UK government.

With regard to Ireland, the United Kingdom is the co-guarantor of the Good Friday Agreement. Today"s speech does not clarify how the UK intends to honour its special responsibility for the consequences of its withdrawal for Ireland. Our objective is to preserve the Good Friday Agreement in all its dimensions, as well as the integrity of the Single Market and the Customs Union.

The United Kingdom recognises that no Member State will have to pay more or receive less because of Brexit. We stand ready to discuss the concrete implications of this pledge. We shall assess, on the basis of the commitments taken by the 28 Member States, whether this assurance covers all commitments made by the United Kingdom as a Member State of the European Union.

Today, for the first time, the United Kingdom government has requested to continue to benefit from access to the Single Market, on current terms, and to continue to benefit from existing cooperation in security. This is for a limited period of up to two years, beyond its withdrawal date, and therefore beyond its departure from the EU institutions.

If the European Union so wishes, this new request could be taken into account by the EU and examined in light of the European Council stated in its guidelines of 29 April 2017: "Should a time-limited prolongation of Union acquis be considered, this would require existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures to apply."

The sooner we reach an agreement on the principles of the orderly withdrawal in the different areas – and on the conditions of a possible transition period requested by the United Kingdom – the sooner we will be ready to engage in a constructive discussion on our future relationship.

The EU shares the goal of establishing an ambitious partnership for the future. The fact that the government of the United Kingdom recognises that leaving the European Union means that it cannot keep all the benefits of membership with fewer obligations than the other Member States is welcome. In any case, the future relationship will need to be based on a balance of rights and obligations. It will need to respect the integrity of the Union"s legal order and the autonomy of its decision-making.

The EU will continue to insist on sufficient progress in the key areas of the orderly withdrawal of the United Kingdom before opening discussions on the future relationship. Agreeing on the essential principles in these areas will create the trust that is needed for us to build a future relationship together.

David Davis and I will meet in Brussels next Monday to begin the fourth round of the negotiations. As always, we are preparing the upcoming round with the 27 Member States and the European Parliament. On Monday I will have a discussion with the European Parliament in its Brexit Steering Group, as well as with all Member States in the General Affairs Council.

We look forward to the United Kingdom"s negotiators explaining the concrete implications of Prime Minister Theresa May"s speech. Our ambition is to find a rapid agreement on the conditions of the United Kingdom"s orderly withdrawal, as well as on a possible transition period.

EU Regulators Take Aim At London's Asset-Management Industry

Brexit negotiations officially began three weeks ago, and whether the UK will retain access to the European Union’s single financial market once they’re over is unknown. Yet that hasn’t stopped regulators on the Continent from taking a swipe at more than a trillion euros in assets, and thousands of well-paying finance jobs required to manage them, that they think belong on the other side of the English Channel.

As Bloomberg reports, the European Securities and Markets Authority issued a ruling saying that “letterbox entities” nominally based in the European Union but managed from abroad will no longer be tolerated.

“The proposal would affect UCITS, a type of mutual fund domiciled in the European Union, that hold about 9.1 trillion euros ($10.3 trillion) of assets. The European Securities and Markets Authority said in May that passports to sell funds - effectively, a stamp of approval allowing fund managers to offer a product globally - should be rejected unless major decisions are made by management based within the bloc.”

The regulator says its Brexit-inspired guidance is intended to prevent “a race to the bottom in oversight standards,” ignoring the fact that the funds can be managed from anywhere in the world. Bloomberg neglects to specify how these funds would be treated according to existing rules: Without this guidance, would these funds be forced to re-domicile in the EU if the UK loses access to the single market? It’s unclear.

“ESMA, which could publish a second take on its opinion this week, said the guidance was prompted by Brexit as it seeks to avoid a race to the bottom in oversight standards. While almost 1.1 trillion euros of UCITS fund assets are domiciled in the U.K., according to PricewaterhouseCoopers, the implications may spread beyond the City of London. UCITS products are often domiciled in Luxembourg and Ireland, but their fund managers can be based anywhere in the world to focus on local markets.”

At least one asset manager is worried about the collateral damage to fund managers who are already based outside of the trading bloc, but choose to domicile their assets in the UK, Ireland or Luxembourg using the “passport” system.

“It could be a threat to the viability of UCITS at the global level,” Dan Waters, managing director at fund management association ICI Global, said in an interview. “There are trillions of euros, dollars, pounds of investments going back and forth right now” through the products, and there’s a chance that the regulator “could inadvertently build barriers around that.”

ESMA already warned back in May that “passports” to sell UCITS should be rejected unless major decisions are made by management based in the bloc. The agency, which does not have legislative powers, said it published the opinion to help “unify European regulators’ approach to fund registration following Britain’s vote to leave the EU.”

Though European politicians have expressed eagerness to grab slices of Britain’s financial industry since the UK voted to leave the trading bloc in June."

Luxembourg and Ireland, two other popular destinations where UCITS funds are domiciled, could attract thousands of jobs in areas from governance to compliance if UK firms are forced to re-register within the EU because of the ESMA guidance, according to John Skelly, a Dublin-based principal at Carne Group, an adviser that helps set up UCITS funds. The guidance is also an important milestone in the Brexit process: It marks the first time that ESMA has said a certain amount of fund-management activity should be based in the EU. Though critics say the order lacks specifics about exactly what functions must be performed from within the bloc.

Some legal experts believe ESMA’s ruling is another example of an overly intrusive government. Simon Currie, a London-based partner at legal firm Morgan Lewis who advises clients on setting up operations in the EU, said “the opinion seems to overreach.”

“It’s quite clear in the directives that you can delegate decision-making in connection with portfolio management to a third country.”

If it stands, the ESMA ruling would leave UK-based firms with two choices: They could either apply to re-domicile in the EU – a process that typically takes about nine months. According to the current Brexit timetable, firms have until next June to submit those plans based on the current Brexit timetable. Fund managers could also opt to abandon UCITS and opt for the less developed passporting regimes in Asia or South America, ICI Global said.

“When ESMA releases its refined opinion, it should help show how many more people investment firms will have to employ in the EU after Brexit if they want to delegate management of the funds to an entity in the U.K., said Matt Huggett, a partner at legal firm Allen & Overy specializing in asset management.

Still, some critics say the regulators" guidance has nothing to do with "best practices."

"...the earlier guidance “looks like an opportunistic move to attract jobs to particular jurisdictions,” Waters said.

"That looks to us like protectionism or regulatory nationalism.""
 

"Painstakingly Detailed" EU Brexit Document Demands UK Payment For Everything

Authored by Mike Shedlock via MishTalk.com,

Brexit without a signed agreement looks increasingly likely as I suggested all along.

EU documents reveal “Painstaking Brexit Detail” down to the smallest item demanded by every nation.

The document also demands arbitration by the European Court of Justice (ECJ). These are both non-starters from the UK side. 

Just 10 days before the general election, the EU published two documents that will affect every person living in Britain for years to come. Despite being dropped into the maelstrom of an election caused by Brexit, there was hardly a murmur.

The documents were the most detailed positions yet from the EU’s chief negotiator, Michel Barnier, on the upcoming divorce talks with the UK.

In two policy papers, the bloc has elaborated its stance on the Brexit bill and citizens’ rights.

The 10-page paper on the bill does not put a price on the divorce, but sets out in painstaking detail all EU bodies with a vested interest in the spoils – 40 agencies, eight joint projects on new technologies and a panoply of funds agreed by all countries, from aid for refugees in Turkey to supporting peace in Colombia.

No detail is too small. Britain is even on the hook for funding teachers at the elite European schools that educate EU civil servants’ children.

On citizens’ rights, the EU spells out in greater detail the protections it wants to secure for nearly 5 million people on the wrong side of Brexit – 3.5 million EU nationals in the UK and 1.2 million Britons on the continent.

In a red rag to hardline Brexiters, the document stresses the European court of justice (ECJ) must have full jurisdiction for ruling on disputes about citizens’ rights, while the European commission ought to have full powers for monitoring whether the UK is upholding the bargain.

“On the side of the 27, people are a little cross and they have hardened their positions,” said Jean De Ruyt, a former EU ambassador. “It is a dangerous situation when you harden positions and you cannot do anything [because formal talks have not begun].”

The divide is stark on the Brexit bill. The European commission president, Jean-Claude Juncker, was shocked after May told him the UK had no obligation to pay anything on leaving the bloc.

Diplomats on the EU side say they cannot contemplate scaling back demands on the divorce. EU civil service pensions will not be bartered away to secure the UK’s post-Brexit contribution to the union’s seven-year budget, known as the multiannual financial framework (MFF), the EU diplomat said.

“I think our priority is that the UK will pay for everything,” they said. “Everything is a priority – we cannot trade pensions for the MFF.”

Ridiculous Demands

Britain’s Brexit Secretary David Davis has mocked the European Union over divorce talks after Brussels published its position papers for talks with the UK on crucial issues.

PressTV reports UK describes EU Brexit demands as ‘ridiculous’.

Davis said on Tuesday that the EU’s demands to protect its citizens’ rights in the UK were “ridiculously high”, giving its citizens greater rights in the UK than Britons have.

“Art of the Deal”

“Art of the Deal” tactics by the EU are not going to work.

The EU exports more to the UK than vice versa. Fishing rights in UK waters are in play. The lower British Pound will temper cost of any tariffs the EU places on UK exports. EU imports to UK will collapse.

It’s hard to imagine a worse negotiating stance than that taken by the EU.

By insisting the UK pay for everything with the ECJ as arbitrator, the EU will instead receive nothing.https://t.co/6ejQ9OnUUB pic.twitter.com/5O93kbjzXJ

— Mike Mish Shedlock (@MishGEA) May 31, 2017

Once again I repeat: Brexit Negotiations: Why Bother?