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What Might the Brexit Decision Mean for You?

As you know, the United Kingdom voted to leave the European Union (EU).

This surprising vote caused the British pound to fall against all major world currencies, stock markets and indexes across the world to drop, bond prices to increase and interest rates to fall. Although most currencies and indexes have retrenched from overnight peaks, uncertainty remains, and markets respond negatively to uncertainty. Here, we lay out some of what this momentous decision might mean for you.

What’s the impact for those not hedging?

Most revenues for the quarter are likely recorded, but the revaluations will get messy if the volatility continues. The biggest threat is that corporations, especially in Europe, might be paralyzed by the tumult, and those quarter-end deals just might not get done.

The Brexit vote illustrates how global markets are affected when big news breaks … and how company financials can be punished for activities outside of their control. Companies without hedge programs will feel the impact of today’s rate volatility next month, while most of those hedging won’t feel the effects until next year. The key benefit of the hedge program is giving management the time to plan for a changing currency environment, rather than knee-jerk reactions that are too little, too late.

While the UK will not immediately leave the EU (it has two years under Article 50), uncertainty will remain: Uncertainty about what this means for the UK and the GBP over those two years, but more immediately what this means for the European Union (additional defections?) and the Euro.

Treasury teams should take this time to put plans in place for an FX hedge program for their companies so that the Brexit roller coaster has minimal impact on the company’s finances.

What’s the impact for Hedge Trackers clients?

For quarter ending June 30, there will be little or no cash flow hedge protection left as companies rarely hedge 100 percent, and as mentioned above, the “Leave” vote might paralyze business activity next week.

The benefits of balance sheet hedge programs will be obvious at this month end (see below), while the cash flow hedge protection will play out over the next year as predicted revenues and expenses in various currencies will come in at the hedged rate, hopefully giving management the time to adjust course for what may (or may not be) a new rate environment.

What’s the impact on Hedge Trackers’ balance sheet program clients?

Balance sheet hedge programs may be stressed, depending on where rates land next Friday. If the hedge notionals aren’t right on and to-date rate movements stick through next week, there will likely be significant FX Gains/Losses where clients were underhedged. It will also be a litmus test for their application of currency accounting rules, especially for daily rate users who might be reversing accruals using last month end rates and rebooking using this month end rate that effectively reclasses FX gains/losses into margin.

We also recommend a review of what is happening to the value of cash and other cash-related balances held in foreign functional entities, as that deterioration or benefit will be hidden in OCI (as CTA: Cumulative Translation Adjustment).

Of course, should you have any questions about your program – or are interested in learning more about setting up a program to protect against currency volatility – please do not hesitate to be in touch.


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