As temperatures hit record lows in February, parts of London’s financial markets are feeling the cold as consequences of Brexit bed in.
The much reported toppling of London as the continent’s top share-trading hub in January is a symbolic moment more than a significant economic shift, but it plays into a wider discussion about the future of the City.
One new survey has London losing ground to New York as the world’s leading financial centre, with the gap widening significantly since the vote to leave.
So what next?
As the transitional aftershock settles in, how well-positioned is the City to turn the tide and profit from its new horizons? Here are the challenges standing in its way.
The UK losing its trading crown to Amsterdam followed more than €6bn of euro-denominated share trading that had already left London.
The bad news kept coming after ICE relocated its carbon-futures trading hub to Amsterdam, too, with EU carbon allowance trades not feasible in the City.
A host of UK business leaders then put their head above the parapet to describe Brexit as a bigger economic problem than the Covid-19 pandemic.
London-based Rick Smith, managing director of financial advisory Forbes Burton, told City A.M.: “Brexit is a real concern for many companies.
“The deal has indeed been done, but we are only now finding out what the fine print was and what this might mean for business.”
But of course, the economic value of a trade is not necessarily where it is executed – but in the clearing of it, the settlement houses and indeed even the army of analysts and risk managers who provide the intellectual ballast to each and every transaction. What happens to them?
As the dusk settled over January, Brussels announced that US clearing houses will be allowed to operate throughout the EU.
Clearing houses act as an official go-between for buyers and sellers of derivatives contracts to ensure financial stability.
London’s divisions have dominated in the EU, but access is due to end in June 2022 without a further extension.
The move to allow American competitors to operate in the bloc could clear the way to locking out the UK’s clearing houses next year. That would be bad news – and unlike the changes to trading executions, would come with a significant financial hit.
However, Bruno Fatier, financial services solicitor at Keystone Law, argues that London cannot be replaced overnight.
“The timing of the loss will depend on how hard private players, especially in Germany, less so in France in my view, are working behind the scenes to build a platform capable of replacing London as the epicentre of clearing in Europe and for the euro,” Fatier said.
Trading in euro-denominated swaps has dropped by nearly 30 per cent since the end of the Brexit transition period on 31 December.
Euro swaps trading in the City of London made up just over 10 per cent of the overall market last month, compared to 40 per cent in July of last year.
Most trade has shifted to New York, Amsterdam, and Paris, as EU platforms made up a quarter of the total euro market compared to only 10 per cent last July.
However, some City insiders believe the lack of an EU-UK equivalence deal could help the City appeal to global players including Hong Kong and Singapore.
The EU’s financial services chief fired up the City’s battle to maintain a strong relationship with the bloc by warning the UK “there cannot be equivalence and wide divergence” in financial regulation.
Mairead McGuinness said equivalence decisions would only be made after the signing of a memorandum of understanding between the two sides by the end of March.
McGuinness likened the memorandum draft to what the EU has with the United States, dampening any remaining hopes that the UK could be granted blanket equivalence.
The latest broadside from the EU, of course, was a response to the growing belief in the City that the UK is better off without hard equivalence arrangements, especially not at the price the EU seems insistent on asking London to pay.
The Governor of the Bank of England, Andrew Bailey, appears to be counted amongst them – saying that the EU’s conditions for equivalence would not be ones the EU would ever agree to.
In a Treasury Select Committee meeting recently, he again emphasised the UK could not be a rule taker – pushing back at the EU’s demand that Britain share its regulatory intentions with them.
And Barclays boss Jes Staley believes Brexit gives the UK the opportunity to define its own financial future and remain competitive with markets outside of Europe.
“I think what London needs to be focused on is not Frankfurt or Paris – it needs to be focused on New York and Singapore,” he said.
That same Duff & Phelps survey which revealed the widening gap between London and New York illustrated one other point.
For all of the efforts of Emmanuel Macron and Angela Merkel over recent years, not one of the respondents mentioned a single European competitor as the global financial leader.