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Crises drive search for policy advice

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Former politicians and civil servants are being hired to bolster law firms’ public policy teams as corporate clients seek guidance on Brexit and coronavirus.

UK law firms, unlike their US counterparts, have not traditionally advised on political risk. But since 2016 demand for strategic advice has soared as businesses try to navigate a shifting geopolitical landscape that now includes coronavirus and Britain leaving the EU.

Covid-19 has led to extraordinary government intervention in swaths of the UK economy — an estimated 30 per cent of the workforce was supported by the state-backed furlough scheme earlier this year.

This week law firm Travers Smith said it was hiring Nicky Morgan, a former Conservative MP and ex-secretary of state, whose roles included leading on government policy about internet regulation. She will be a consultant to the firm focusing on technology. Geoffrey Cox QC, a Tory MP and former attorney-general, has taken a role at Withers as a consultant global counsel, having received official permission to do so.

Charles Brasted, head of public law and policy at law firm Hogan Lovells, says the intersection of politics, business and policy has become more significant. “As business has grown more complex, so has regulation,” he says. “In the past few months state involvement in business has grown [more than ever] and the environment is less predictable than for a long time.”

The US has a long tradition of lawyer-lobbyists and a revolving door between politics and law firms with public policy practices. US law firms Akin Gump and Squire Patton Boggs hired ex-congressmen last year and Covington & Burling boasts of a “mini state department,” with more than 120 advisers, including former government officials, diplomats and regulators, who work with lawyers.

Hogan Lovells, created from a 2010 transatlantic merger, was able to call on the political expertise of its Washington DC office in advising clients on Brexit as early as 2014. The firm more recently hired Robert Gardener, a public policy expert and former civil servant in the UK government’s Cabinet Office.

In 2015 Linklaters recruited William Hague, former UK foreign secretary, to chair its international advisory group which brings in external perspectives into the firm. He and Meghan O’Sullivan, a former US deputy national security adviser for Iraq, spoke about the ramifications of Covid-19 to clients this year.

DLA Piper’s government affairs team includes Paul Hardy, who formerly worked at the European Commission and as senior EU legal adviser to both Houses of Parliament.

Many law firms believe they have an edge over traditional public affairs and political consultancies because they can press a client’s point to the government using their deep technical legal knowledge. They can also react quickly for clients when legislation is drafted, rather than the client issuing a judicial review to challenge new laws once they are on the statute book.

Avonhurst, founded last year by former Jones Day lawyer Jonathan Bloom, is a UK political strategy and legal advisory boutique firm that helps corporate clients and investors assess where to invest capital by studying political risk. Its head of global political strategy, Tina Fordham, is a former global political analyst at Citi. Other senior advisers include Gavin Barwell, former chief of staff to then prime minister Theresa May during her key Brexit negotiations, and Nick Houghton, a former UK chief of defence staff.

“We are seeing more political dimensions in all transactions such as private equity and M&A,” Mr Bloom says. The firm helps clients decide where to deploy capital by using a data driven analysis of geopolitical factors. A client might seek advice on the possible direction of a populist government and what that means across five industry sectors, for example. “It is almost underselling ourselves to call it a law firm,” he suggests.

Law firm public policy teams expect demand for their services to continue to rise. “This area is going to be more important for law firms given the level of political unpredictability that we have at the moment,” says Mr Brasted.

Note: ‘winner’ indicates the organisation won the FT Innovative Lawyers: Europe 2020 award for ‘Innovative practice groups and teams’; other organisations are ranked alphabetically within bands



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Gensler raises concern about market influence of Citadel Securities

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Gary Gensler, new chair of the Securities and Exchange Commission, has expressed concern about the prominent role Citadel Securities and other big trading firms are playing in US equity markets, warning that “healthy competition” could be at risk.

In testimony released ahead of his appearance before the House financial services committee on Thursday, Gensler said he had directed his staff to look into whether policies were needed to deal with the small number of market makers that are taking a growing share of retail trading volume.

“One firm, Citadel Securities, has publicly stated that it executes about 47 per cent of all retail volume. In January, two firms executed more volume than all but one exchange, Nasdaq,” Gensler said.

“History and economics tell us that when markets are concentrated, those firms with the greatest market share tend to have the ability to profit from that concentration,” he said. “Market concentration can also lead to fragility, deter healthy competition, and limit innovation.”

Gensler is scheduled to appear at the third hearing into the explosive trading in GameStop and other so-called meme stocks in January.

Trading volumes in the US surged that month as retail investors flocked into markets, prompting brokers such as Robinhood to introduce trading restrictions that angered investors and drew the attention of lawmakers.

The market activity galvanised policymakers in Washington and investors. Lawmakers have focused much of their attention on “payment for order flow”, in which brokers such as Robinhood are paid to route orders to market makers like Citadel Securities and Virtu.

That practice has been a boon for brokers. It generated nearly $1bn for Robinhood, Charles Schwab and ETrade in the first quarter, according to Piper Sandler.

Gensler noted that other countries, including the UK and Canada, do not allow payment for order flow.

“Higher volumes of trades generate more payments for order flow,” he said. “This brings to mind a number of questions: do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict?”

Gensler also said he had directed his staff to consider recommendations for greater disclosure on total return swaps, the derivatives used by the family office Archegos. The vehicle, run by the trader Bill Hwang, collapsed in March after several concentrated bets moved against the group, and banks have sustained more than $10bn of losses as a result.

Market watchdogs have expressed concerns that regulators had little or no view of the huge trades being made by Archegos.

“Whenever there are major market events, it’s a good idea to consider what risks they might have placed on the entire financial system, even when the system holds,” Gensler said.

“Issues of concentration, whether among market makers or brokers at the clearinghouse, may increase potential system-wide risks, should any single incumbent with significant size or market share fail.”



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European markets recover after tech stock fall

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European equities rebounded from falls in the previous session, when fears of a US interest rate rise sent shares tumbling in a broad decline led by technology stocks.

The Stoxx 600 index gained 1.3 per cent in early dealings, almost erasing losses incurred on Tuesday. The UK’s FTSE 100 gained 1 per cent.

Treasury secretary Janet Yellen said at an event on Tuesday that rock-bottom US interest rates might have to rise to stop the rapidly recovering economy overheating, causing markets to fall.

Yellen then clarified her remarks later in the day, saying she did not think there was “going to be an inflationary problem” and that she appreciated the independence of the US central bank.

Investors had also banked gains from technology shares on Tuesday, after a strong run of quarterly results from the sector underscored how it had benefited from coronavirus lockdowns. Apple fell by 3.5 per cent, the most since January, losing another 0.2 per cent in after-hours trading.

Didier Rabattu, head of equities at Lombard Odier, said that while investors were cooling on the tech sector, a rebound in global growth at the same time as the cost of capital remained ultra-low would continue to support stock markets in general.

“I’m seeing a healthy correction [in tech] and people taking their profits,” he said. “Investors want to be much more exposed to reflation and the reopening trades, so they are getting out of lockdown stocks and into companies that benefit from normal life resuming.”

Basic materials and energy businesses were the best performers on the Stoxx on Tuesday morning, while investors continued to sell out of pandemic winners such as online food providers Delivery Hero and HelloFresh.

Futures markets signalled technology shares were unlikely to recover when New York trading begins on Wednesday. Contracts that bet on the direction of the top 100 stocks on the technology and growth-focused Nasdaq Composite added 0.2 per cent.

Those on the broader S&P 500 index, which also has a large concentration of tech shares, gained 0.3 per cent.

Franziska Palmas, of Capital Economics, argued that European stock markets would probably do better than the US counterparts this year as eurozone governments expand their vaccination drives.

“While a lot of good news on the economy appears to be already discounted in the US, we suspect this may not be the case in the eurozone,” she said.

Brent crude, the international oil benchmark, was on course for its third day of gains, adding 0.7 per cent to $69.34 a barrel.

Despite surging coronavirus infections in India, the world’s third-largest oil importer, “oil prices have moved higher on growing vaccination numbers in developed markets”, said Bank of America commodity strategist Francisco Blanch.

Government debt markets were subdued on Wednesday morning as investors weighed up Yellen’s comments with a pledge last week by Federal Reserve chair Jay Powell that the central bank was a long way from withdrawing its support for financial markets.

The yield on the 10-year US Treasury bond, which moves inversely to its price, added 0.01 of a percentage point to 1.605 per cent.

The dollar, as measured against a basket of trading partners’ currencies, gained 0.2 per cent to its strongest in almost a month.

The euro lost 0.2 per cent against the dollar to purchase $1.199.



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Yellen says rates may have to rise to prevent ‘overheating’

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US Treasury secretary Janet Yellen warned on Tuesday that interest rates may need to rise to keep the US economy from overheating, comments that exacerbated a sell-off in technology stocks.

The former Federal Reserve chair made the remarks in the context of the Biden administration’s plans for $4tn of infrastructure and welfare spending, on top of several rounds of economic stimulus because of the pandemic.

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,” she said at an event hosted by The Atlantic magazine.

“So it could cause some very modest increases in interest rates to get that reallocation. But these are investments our economy needs to be competitive and to be productive.”

Investors and economists have been hotly debating whether the trillions of dollars of extra federal spending, combined with the rapid vaccination rollout, will cause a jolt of inflation. The debate comes as stimulus cheques sent to consumers contribute to a market rally that has lifted equities to record levels.

Jay Powell, the Fed chair, has said that he believes inflation will only be “transitory”; the central bank has promised to stick firmly to an ultra-loose monetary policy until substantially more progress has been made in the economic recovery.

The possibility of interest rates rising has been a risk flagged by many investors since Joe Biden’s US presidential victory, even as markets have continued to rally.

Yellen’s comments added extra pressure to shares of high-growth companies, whose future earnings look relatively less valuable when rates are higher and which had already fallen sharply early in Tuesday’s trading session. The tech-heavy Nasdaq Composite was down 2.8 per cent at noon in New York, while the benchmark S&P 500 was 1.4 per cent lower.

Market interest rates, however, were little changed after the remarks, with the yield on the 10-year Treasury at 1.59 per cent. Yellen recently insisted that the US stimulus bill and plans for more massive government investment in the economy were unlikely to trigger an unhealthy jump in inflation. The US treasury secretary also expressed confidence that if inflation were to rise more persistently than expected, the Federal Reserve had the “tools” to deal with it.

Treasury secretaries generally do not opine on specific monetary policy actions, which are the purview of the Fed. The Fed chair generally refrains from commenting on US policy towards the dollar, which is considered the prerogative of the Treasury secretary.

Yellen’s comments at the Atlantic event were taped on Monday — and she used the opportunity to make the case that Biden’s spending plans would address structural deficiencies that have afflicted the US economy for a long time.

Biden plans to pump more government investment into infrastructure, child care spending, manufacturing subsidies and green energy, to tackle a swath of issues ranging from climate change to income and racial disparities.

“We’ve gone for way too long letting long-term problems fester in our economy,” she said.



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