Photo: Reuters archive
Britain’s exit from the European Union (EU) has left a visible mark on the City of London. In almost one night in early January, the world’s leading financial center lost about half of its share trading and much of its derivatives trading. Bloomberg TV Bulgaria.
The next affected element of the financial industry may be clearing. Clearing is a vital financial infrastructure that London dominates. Its sheer size – trillions of dollars in derivatives every day – makes it an even bigger political goal for the EU than stock trading, Eliza Martinuzzi wrote for Bloomberg.
The excitement about where key risk managers and decision-makers in the financial industry will be based worries some City greats as much as the potential loss from swap clearing. That is why the EU’s increasingly firm stance against providing regulatory “equivalence” to British finances, which will allow bankers to operate unhindered in Europe, has become the biggest fear at the moment.
Europe is also considering forcing asset managers who process portfolios for EU entities to do so on the continent.
Monitoring the number of bank moves is not an easy task and neither side will be able to declare victory any time soon. But London’s future is inextricably linked to its senior traders, as well as professional lawyers and accountants. Crossing the English Channel would lead to a major change in UK tax revenue, much more than low-margin clearing.
Since the UK completed its exit from the EU in December 2020, around 7,500 positions have moved to Europe. But the leeway provided by regulators during the pandemic is running out. France has warned that financial companies face criminal charges if they do not have enough local staff to ensure sound risk management.
The European Securities and Markets Authority has warned of “questionable practices” in which companies find workarounds for rules separating Britain from Europe.
Without permission to work with most European businesses in London, banks have to manage things from their offices on the continent. International banks have agreed to transfer 1.2 trillion euros in assets to European branches, which is important for financial stability.
In Ireland, for example, Britain’s Barclays is now the largest bank in the country, having moved about 15% of its assets on its balance sheet there after Brexit.
On the continent, JPMorgan Chase & Co., Morgan Stanley and the Goldman Sachs Group have units that are directly controlled by the European Central Bank (the ECB controls a total of 117 financial institutions). Regulators have a duty to ensure that, if any of these companies fall into a solvency crisis, their managers in Frankfurt, Paris or Dublin can be held accountable.
The threat to London from this brain drain is so serious that some are wondering if it would be better to abandon clearing to ensure equivalence for other financial activities. Britain and the EU are drawing up a memorandum of understanding that should create a financial regulation framework that could pave the way for giving London more access to the continent – or at least that is the hope in Britain.
London has lost its stock trading crown to Amsterdam, but the real game is elsewhere. The more significant changes in London’s dominance will be finer and less noticeable – until they become too great.
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