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In Asia, financial firms wake up to Brexit risks, begin contingency planning

[HONG KONG] The Hong Kong exchange has begun a Brexit impact assessment, and some Asian asset managers are looking to set up new bases in mainland Europe amid growing concerns their operations could be disrupted if Britain votes to leave the European Union in a June referendum.

The central banks of Hong Kong and Singapore told Reuters they were also closely monitoring developments around the June 23 vote. A spokeswoman for the Hong Kong Monetary Authority warned of "significant uncertainties" in the event of an "Out" vote.

The contingency planning highlights concerns that Brexit, as Britain leaving the EU has been called, could have ripple effects in Asia-Pacific by cutting off the UK's Asian finance investors from the EU financial market. Other regions are also making Brexit preparations.

Opinion polls have pointed to a close vote, though the most recent polls show rising support for Britain staying in the EU.

"A potential Brexit is an issue no organisation can afford to ignore," said a spokesman for Hong Kong Exchanges & Clearing (HKEx), which took over the London Metal Exchange (LME) and its clearing house in 2012. "We are carrying out an impact assessment for both the LME and LME Clear and are addressing the short-, medium- and long-term implications for both potential outcomes of the UK referendum."

The bourse declined to elaborate on its impact assessment, though risk management experts said it would likely cover the legal, regulatory and operational implications of Brexit, as well as volatility scenarios and potential market disruptions.

Asian investors using Britain as their European base said they may establish operational bases in Frankfurt or Luxembourg, fearing an "Out" vote would disrupt their ability to offer services and products across the 28-nation EU.

"There's lots of uncertainty. If the vote is "Out" would London be a platform for accessing Europe?" asked Sammi Shen, executive director at Shanghai Nord Engine Asset Management Group, a US$3 billion Chinese investment management company which set up a London office only last year.

"We would find a European partner or set up an office in Europe: that's our back-up plan," she said, listing Frankfurt and Luxembourg as the preferred locations.

HEDGING BETS Britain's financial services industry has attracted 100 billion pounds (S$192.74 billion) in foreign direct investment since 2007, or nearly a third of the total, according to financial services lobby group CityUK.

London has also sold itself to Chinese banks as the biggest yuan currency clearing hub outside Asia.

Leaving the EU could risk unravelling financial services agreements that have helped turn Britain into Europe's financial powerhouse, accounting for a quarter of all EU financial services income, according to the Bank of England.

For now, a financial services company with a licence or 'passport' to operate in Britain can automatically offer its products and services throughout the EU, reducing compliance and operational costs. An "Out" vote could see Britain lose that critical access - a major concern for Chinese and Hong Kong firms, many of which have recently set up in London.

Asia-Pacific companies spent more than US$1.7 billion on greenfield UK wholesale financial services investments in 2011-15, with China the largest average investor, according to FT data source fDi Markets, excluding M&A activity.

A senior executive of a major Chinese asset manager which uses Britain as its EU base said he was worried his firm may no longer be able to distribute funds across Europe.

"We'll ensure we don't have all our eggs in one basket and will establish a fund management entity and fund platforms outside the UK to hedge our bets," said the executive, who didn't want to be named due to the sensitivity of the matter.

The executive and Nord Engine's Shen said they would not abandon London as it would remain a major market and offers a deep talent pool.

More than two million people work in financial services in the UK and typically have the right under EU rules to work across the bloc without requiring work permits. Brexit could change that.

Michel Lowy, CEO of Hong Kong-headquartered fixed income specialist SC Lowy, which has operated in London since 2012, said an "Out" vote was a concern due to potential visa restrictions: "Will people need a working visa overnight?"

If Britain opts out of the EU, London would have two years to renegotiate existing trade and services agreements.

"The problem is that there is really no precedent, and traditional free trade agreements don't really cover financial services very well," said Andrew Naylor, Singapore-based executive director at Cicero Group, a consultancy helping Asian financial firms weigh the Brexit risks. "That's a big concern for our Asian financial services clients as many use the UK as their entry point for Europe."

REUTERS