By Simon Clark
Brexit trade negotiations are down to the wire this week. Even
if the U.K. and European Union strike an accord, it won't cover
Britain's most valuable industry, and one coveted by the EU:
That has set off a land grab between the 27-nation bloc and the
U.K. for lucrative financial transactions and the jobs and clout
that come with them. The financial services sector has the biggest
trade surplus of any industry in the U.K., with exports in 2019 of
GBP79 billion, equivalent to $106 billion.
European regulators have demanded banks base certain operations
currently conducted in London in the EU post-Brexit. Banks such as
Goldman Sachs Group Inc. and exchange operators such as the London
Stock Exchange Group PLC have set up trading operations on the
continent in recent weeks. The EU last week committed to rules
governing derivatives that will prevent London-based traders at EU
banks from continuing business seamlessly after Brexit is completed
on New Year's Eve.
"This is part of a wider strategy of moving finance into the
EU," said Tim Cant, a London-based lawyer at Ashurst Group, which
specializes in financial regulation. "It's part of that wider
movement of euro-denominated business into the eurozone."
Assets worth GBP1.2 trillion are already heading to continental
Europe from the U.K. following the country's 2016 Brexit vote,
according to accounting firm Ernst & Young, and hundreds of
employees at JPMorgan Chase & Co., Goldman Sachs, Morgan
Stanley and other banks are moving to Frankfurt, Paris and other
The U.K.'s departure from the European single market means that
London-based banks, exchanges and financial firms will lose
automatic access to EU markets from Jan. 1. To serve customers in
the EU next year, U.K.-based institutions will have to be granted
equivalence rights, under which the EU allows them to conduct
certain financial activities. These rights can be withdrawn at
One key battleground is derivatives trading, which is dominated
by London. The Nov. 25 decision by the EU's European Securities and
Markets Authority effectively prevents the London-based units of EU
banks from trading with U.K.-regulated firms unless they transact
on venues in another jurisdiction which both sides recognize: the
swap execution facilities, or SEFs, of New York.
"This is a very political issue, but I think what we need to
realize is, not saying anything [about the financial sector] on
either side is not going to result in either the U.K. or the EU
winning," Emma Tan, vice president of regulatory affairs at
JPMorgan said. "It's really going to be the case that, ironically,
U.S. SEFs will be the main beneficiaries of the absence of
Based on French bank data, about 70% of trade volumes executed
by EU banks in the U.K. are at risk, Robert Ophèle, chairman of
France's financial markets regulator, said.
"It will either be lost or carried out on U.S. SEFs," he
ESMA said it recognized its derivatives decision makes life
difficult for London traders at EU banks.
"This is a political decision beyond ESMA's remit," Fabrizio
Planta, the body's head of markets and data reporting, said. "ESMA
have been calling the industry to adjust their business model in
anticipation of Brexit."
While the EU hasn't granted equivalence rights to U.K.
derivatives trading venues, it has granted them to British clearing
houses, which operate between buyers and sellers in trades and
pledge to complete the deal even if one side reneges. London has
much of this financial plumbing, which manages trillions of dollars
of derivatives contracts every day.
However, the time frame for equivalence on clearing is limited
to June 2022 and some companies are feeling pressure to move it to
the EU. German and French government officials have asked one
global bank with significant operations in London to explain how it
will transfer clearing into the EU after the deadline, according to
a person familiar with the situation.
London will remain Europe's dominant financial hub for now, say
financial professionals. Financiers in the city see two regulatory
paths ahead, one that tries to stay closely aligned with EU rules,
and another that strikes out on its own, changing regulations in a
bid to attract business.
"Fragmentation only breaks what we have built together," William
Russell, the lord mayor of the City of London Corporation, which
manages the U.K. capital's finance district, said. "It is bad for
business and bad for consumers."
Some Brexit supporters favor divergence, with the U.K. setting
cheaper, less onerous rules. Daniel Hodson, the former chief
executive of London's LIFFE futures exchange, which is now part of
Intercontinental Exchange Inc., said EU law was too
"Here you can do it unless we say you can't," Mr. Hodson said in
a recent debate organized by the Bruges Group, which campaigned for
Brexit. "There you can't do it unless we say you can."
Finance firms aren't waiting around. On Nov. 24, Goldman Sachs
said it was starting Sigma X Europe, a Paris-based platform to
trade European shares, in addition to its U.K. Sigma platform. And
the London Stock Exchange is adding Turquoise Europe, an
Amsterdam-based platform for trading, to its London platform.
"We want to ensure that our clients continue to have access to
all of our key liquidity sources post-Brexit," Liz Martin, global
co-head of futures and equities electronic trading at Goldman
Write to Simon Clark at email@example.com
(END) Dow Jones Newswires
December 04, 2020 06:17 ET (11:17 GMT)
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