On June 23, 2016 British citizens voted to leave the European Union. They had until March 29, 2019 to develop a “Withdrawal Agreement” that might have smoothed over the transition, but the political stalemate quashed that opportunity as the British parliament rejected the government’s Brexit deal for the third time. Because no agreement was reached, the UK will become a “third-country” on April 12, 2019 without any transitional arrangements, which is referred to as a “hard” Brexit.

If you don’t live in England, you might be wondering why you should care, and I would say that this current Brexit experiment likely contains a black swan event that could topple the fragile global financial system because the City of London dominates global derivative trading, those leveraged bets based upon the price action of an underlying asset or instrument.

Since the 2008 financial crisis there has been a push to run derivative trades through Central Counter Parties (CCPs) also known as central clearing houses. Even though most trades continue to be done in the opaque OTC market, CCPs have grown in systemic importance because they stand between the counter parties in a derivative trade. If a counter party defaults, the CCP is holding the collateral to make that trade good. Does that make you feel safe?

It shouldn’t, because the collateral being held could well be the equity in your 401K, IRA, Insurance contract, bank or brokerage account. In addition, this collateral has most likely been hypothecated (used multiple times) by a string of counter party banks. They get the collateral from pension plans, insurers, mutual fund managers, ETFs etc. City of London hypothecation rules that the same collateral can be used an unlimited number of times. This is one way to create false liquidity, but it also puts that equity in hidden jeopardy.

As long as there are a limited number and orderly defaults, the public would never know how their wealth is being used and leveraged by commercial banks, but in a financial crisis like 2008, that equity could evaporate into a derivative black hole. A hard Brexit threaten to reveal this because CCPs (LCH, ICE, LME) located in the City of London would have been prohibited from clearing ANY of the $41 trillion notional derivative contracts.

In February, rules were changed to allow those three central clearing houses to continue clearing EU transactions. Some assume the financial catastrophe has been averted because they all agreed on this rule change. We’ll know after April 12th. But even if it has been, other risks loom for British citizens because either way, England is headed toward a depression and as always, it is the public that pays the highest price.

With most global interest rates anchored near zero and balance sheets at nose bleed levels, central bankers are out of ammo. We can all expect negative interest rates (attacking principal) and even higher debt levels put on the backs of taxpayers and that is most likely to trigger the biggest risk of all… revolution, which is really what Brexit is all about to begin with.

The 2008 crisis made clear who was too big to fail. Since then the elite have gotten richer and the average guy poorer as income inequality has expanded across the globe. Without the debt tools to cover up the next crisis, the elites are in jeopardy of losing control.

What can you do to protect yourself and your family? Hold some wealth outside the system created by banks. Gold, the true safe haven asset.

 

Slides and Links:

https://www.thelocal.fr/20190322/macron-brexit-is-a-political-lesson-to-us-all

https://www.esma.europa.eu/sites/default/files/library/esma90-1-83_public_statement_-_brexit_update.pdf

https://www.ft.com/content/c2519f62-cbd4-11e8-9fe5-24ad351828ab

https://www.ft.com/content/7a318a42-cb9f-11e8-b276-b9069bde0956

https://www.reuters.com/article/britain-eu-exchanges/update-1-uk-clearing-houses-approved-to-continue-eu-business-under-no-deal-brexit-idUSL5N20D15X

https://www.theguardian.com/business/2019/jan/07/city-firms-prepare-to-shift-800bn-out-of-uk-as-brexit-looms

https://www.imf.org/en/Publications/WP/Issues/2018/10/31/The-Morning-After-The-Impact-on-Collateral-Supply-After-a-Major-Default-46315

https://www.imf.org/external/pubs/ft/wp/2013/wp1303.pdf

https://www.reuters.com/article/us-britain-usa-derivatives/uk-and-u-s-regulators-build-brexit-bridge-for-derivatives-idUSKCN1QE15Q

https://www.reuters.com/article/britain-eu-exchanges/update-1-uk-clearing-houses-approved-to-continue-eu-business-under-no-deal-brexit-idUSL5N20D15X

https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/190325-statement-emir-csdr-technical-adjustments_en.pdf

https://www.esma.europa.eu/sites/default/files/library/esma90-1-83_public_statement_-_brexit_update.pdf

https://www.bloomberg.com/news/articles/2019-02-16/how-a-no-deal-brexit-is-shaping-up-from-banks-to-food-supplies

https://www.cftc.gov/PressRoom/PressReleases/7896-19https://www.ft.com/content/be6212a4-334b-11e9-bd3a-8b2a211d90d5

https://www.standard.co.uk/news/uk/brexit-fog-puts-the-brake-on-britains-economic-growth-a4060521.html

https://www.bloomberg.com/news/articles/2019-02-16/how-a-no-deal-brexit-is-shaping-up-from-banks-to-food-supplies

https://www.irishexaminer.com/breakingnews/world/bank-of-England-issues-stark-recession-warning-over-no-deal-Brexit-888602.html

https://tradingeconomics.com/united-kingdom/central-bank-balance-sheet

https://www.cnbc.com/2019/01/22/bridgewaters-dalio-the-next-economic-downturn-worries-me-the-most.html?recirc=taboolainternal

https://www.bloomberg.com/news/articles/2016-07-01/three-charts-show-how-precious-brexit-is-for-gold-and-silver

https://www.cnbc.com/2019/03/29/larry-kudlow-i-dont-think-the-underlying-economy-is-slowing.html

https://tradingeconomics.com/united-kingdom/gold-reserves

YouTube Short Description:

On June 23, 2016 British citizens voted to leave the European Union. They had until March 29, 2019 to develop a “Withdrawal Agreement” that might have smoothed over the transition, but the political stalemate quashed that opportunity as the British parliament rejected the government’s Brexit deal for the third time. Because no agreement was reached, the UK will become a “third-country” on April 12, 2019 without any transitional arrangements, which is referred to as a “hard” Brexit.

This is likely to impact every aspect of England’s economy in a negative way. In fact, the Bank of England’s Mark Carney, anticipates a recession worse than 2008.

What can you do to protect yourself and your family? Hold some wealth outside the system created by banks. Gold, the true safe haven asset.