BNY Mellon: A Mid-Week Update

28 feb 2019

A “meaningful vote” by March 12

• The UK’s House of Commons has been promised that by March 12 it will have been given a meaningful vote on the revised deal set to be brought back from Brussels from Prime Minister Theresa May. A meaningful vote in favour of the deal must take place before the European Parliament can decide on whether it consents to the withdrawal agreement.
• The BBC’s political editor Laura Kuenssberg has noted rumours that the meaningful vote could take place next week.

What needs to be evaluated when considering whether the government will win the vote?

• On January 15 the House of Commons rejected the deal negotiated with Brussels for the withdrawal of the UK from the EU by 432 to 202. This was the most decisive rejection of a piece of legislation by the UK Parliament ever. 118 out of 317 Conservative MPs voted against the deal.
• While the EU has been clear that it is not prepared to reopen the already negotiated withdrawal deal, has hinted it is prepared to provide a codicil of some kind.
• Jacob Rees-Mogg, leader of the Conservative Party’s main grouping of Eurosceptic MPs (numbering around 90 of 313 active lawmakers on Conservative benches), is no longer insisting that the “Irish backstop” be scrapped as a condition for his support for the PM’s deal and is prepared to consider other legal fixes to ensure it does not become permanent. He says that he could accept a codicil attached to the agreement stipulating that the backstop cannot be a permanent arrangement. However, he notes that the codicil must have an equal legal status to the withdrawal treaty itself.
• On February 14 the government suffered a defeat in a Commons vote over her approach to Brexit. MPs rejected her motion by a majority of 45. A significant number of Conservative eurosceptic MPs abstained in the vote.
• Nigel Dodds, deputy leader of the DUP (which holds 10 seats in Parliament) said on Tuesday: “She must know that without a legally watertight way out of the backstop then certainly we could not support any future Withdrawal Agreement brought to this House.”

A second referendum?

• Following yesterday evening’s vote in Parliament, Labour leader Jeremy Corbyn said: “We will back a public vote in order to prevent a damaging Tory Brexit or a disastrous no-deal outcome.” However, he added that he would “continue to push” for other options, including Labour’s Brexit plan and a general election.
• Shadow chancellor John McDonnell confirms Labour will put down an amendment to call for a second referendum after the next meaningful vote.
• On January 29 an amendment was voted on in the House of Commons that would have provided a potential route to calling a second referendum. It was defeated by 321 to 301.
• It is still considered unlikely that there is sufficient support for a second referendum.

What happens if the revised deal is rejected in a meaningful vote?

• A “no deal” Brexit remains the default option on March 29 unless Article 50 is extended, Article 50 is revoked or a deal is agreed with the EU.
• If the House of Commons rejects the renegotiated deal, the PM has said she will then give MPs another vote on whether to press ahead with a no-deal Brexit.
• On January 29 the House of Commons voted 318 (including 17 Conservative MPs) to 310 (including 3 Labour MPs) in favour of a non-legally binding amendment that rejected “the United Kingdom leaving the European Union without a Withdrawal Agreement and a Framework for the Future Relationship.”

What happens if Parliament rejects leaving the EU without a negotiated deal?

• If parliament rejects no-deal, MPs would then be asked by March 14 whether they wanted a “short limited extension to Article 50”. If they did not then the UK would leave the EU on March 29 without a deal. If they did then government would subsequently seek the EU’s agreement for a delay and bring forward the necessary legislation.
• MPs could amend the motion to seek a much longer delay.
• Yesterday evening saw 88 Conservative MPs, 10 Labour MPs and 9 DUP MPs abstain in a vote on an amendment that if MPs vote to delay Brexit then the government should seek an extension from the EU and bring forward legislation to change, in law, the date of the UK's departure.20 Conservative MPs voted against the amendment. More Labour than Conservative MPs voted for an amendment that effectively endorsed the government’s plan.

What might a “short extension” to Article 50 look like?

• PM Theresa May said the extension could not extend beyond the end of June and “would almost certainly be a one-off” because the UK would not have participated in European elections.

What would happen at the end of that time?

• Were no deal to have been agreed upon then the default position would remain a “no deal” Brexit.

Would the EU be prepared to offer a “short extension” to Article 50?

• Unknown. German Chancellor has said she would be open to providing the UK with “a little more time”.. However, there have been a number of reports suggesting that a “short, limited extension” of Article 50 would not be permitted by Brussels.

Would the possibility of an extended extension increase support within Parliament for the existing withdrawal deal?

• Unknown but possible.

GBP and a delay to Article 50

• The defeat of the Cooper amendment on January 29 was also the point that the main slide in GBP emerged. This was consistent with GBP’s price action two weeks earlier when it had rallied sharply following a hint from the PM on the possibility of an extension to Article 50 in her statement after her defeat in the meaningful vote in the House of Commons.
• GBP’s performance this week has conformed to this pattern with gains emerging as the news flow has raised the possibility of an extension to Article 50.
• Longer dated ATMF implied volatility has been collapsing since February 15 (the day after the House of Commons rejected the withdrawal deal for a second time) as political forces have begun to shift in Parliament. However, stress remained on the shorter dates as uncertainty remained over what would happen next. The move to provide MPs with the option of voting in favour of an extension to Article 50 has (logically enough) been met with an easing in prices at this end as well.