Sitting in a meeting last week, a number of bankers shared their views on how the financial markets had coped following the result of the UK referendum to leave the EU.
The key takeaway was that (although the precise result may have been a surprise), everybody was prepared and this level of preparedness, along with the gradual release of news over several hours as the results came in, effectively mitigated the risk of the markets seizing up.
The great advantage, if we can call it that, was that everybody knew the timing of any ‘surprise’ and could put plans in place to manage any volatility. So the banks made sure that they had pre-approved credit limits in place, were fully staffed up (and not just in UK and Europe), ensured that no pesky systems updates would be implemented over the critical period and generally got lined up ready for whatever came up.
Corporates knew what was coming (i.e. more uncertainty), and the majority were well prepared having made sure that they were fully funded, had all their hedging activity up to date and were compliant with their treasury policies. For the vast majority it is always easier to explain why they took the cautious approach – rather than have to explain why a widget manufacturer thought being unhedged was a ‘good idea’.
However, the general consensus was that we should absolutely not be complacent.
Knowledge of the timing of this event was key to the successful risk management - compare the post Brexit events to the market dislocation following the unforeseen CHF uncoupling from the Euro in January 2015. Such forewarning is a luxury unlikely to be awarded us when the next event happens. Volatility will assuredly return - possibly post the US elections in November, possibly as Article 50 is invoked by the UK government, perhaps when markets recognise the fundamental disconnect between the strength of the equity and debt markets compared to the historically low interest rates, or perhaps as the realisation dawns that all the bank regulation in recent years really hasn’t removed risk from the system and has just moved it on, arguably to somewhere less transparent (such as CCPs perhaps)?
From a corporate perspective, the message is clear and not new: corporates must do their utmost to be prepared for whatever is thrown at them.
Fundamentally corporates need to make sure that, as far as possible, they remain alert and as prepared as they were for the UK referendum, to retain as much flexibility as possible so that they do not have to execute a transaction on any given day (and yes, I realise how difficult this can be in the case of major transactions).
Practically, companies need to make sure that they have up to date and appropriate risk management policies in place – covering everything from fixed/floating interest rate mix, through counterparty risk to liquidity management - and are compliant with them. They must also be engaged internally and be party to strategic planning within the organisation so that they can advise and prepare appropriately.
In periods of uncertainty, more than ever, the treasury team must ensure that they are keeping up and not being ‘bounced’ into the market.
