Clearing houses (intermediaries in interbank derivative transactions) have become a key battleground after Brexit. The Commission has twice been forced to back down and extend UK clearing rights for EU banks and money managers due to fears about financial stability.
The city’s € 660 trillion (£ 563 trillion) clearing market is by far the largest center of its kind in Europe, managing around 90% of its interest rate derivatives. interest in euros in a business watched by rivals like Paris.
The EU has pledged to punish banks for not moving the lucrative clearing business to the mainland and has insisted that the temporary extension allowing them to trade through London will not be extended beyond 2025.
This threat, which includes the prospect of higher charges for non-compliant companies, has not been well received by European banks.
Its main banking pressure groups strongly oppose planned reforms, with the European Banking Federation (EBF), its most powerful banking association, saying the plans would cause “serious market disruptions” and “significantly weaken the attractiveness”. and competitiveness “of the EU. clearing houses.
The EBF, led by Santander director Ana Botin, warned that international clients “will transfer their entire capital markets business (not just the clearing business) to non-EU institutions” if the Commission pushes forward plans for “forced relocation”.
Experts also warn that the creation of a rival market to London will be embroiled in difficulties. Andrew Gray, global head of Brexit for financial services at consulting giant PwC, says: “It will be very difficult. [for the EU] to create a rival compensation market. These markets require liquidity and the EU does not have the depth and breadth of liquidity that exists in London. ”
He also warns that it could increase costs and risk for businesses, adding: “No company would want to have to move the clearing business if it didn’t need to.”
Andrew Pilgrim, head of government and financial services at EY, agrees. “Cleaning is a sticky activity,” he says. “The EU does not want to outsource its compensation to a third country, but creating a market similar to the United Kingdom is very difficult and there are no easy answers. There is not much desire in the industry [shift activity to the Continent]. ”
Another policy that has bothered international banks operating in both jurisdictions is the so-called desk-mapping review of the European Central Bank (ECB). The ECB last month ordered eight banks to move staff out of London to Paris, Frankfurt and Dublin.
The central bank has identified 56 groups of traders who it says should do their job from the EU after a lengthy investigation into whether institutions want to dodge post-Brexit rules.
But again, the power outage has caused friction. U.S. bankers plan to express concern to the ECB in the coming months about forced relocations, and an executive says the move will lead to less efficient and effective risk management.
PwC Gray says this is clearly not something banks would choose to do, but they will have few more options if it is a mandatory regulatory step.
He points out that there are now more people working in the financial services sector in London than before the 2016 Brexit referendum, given the dynamics of the industry in recent years, adding that there have been no “massive waves” of relocations.
EY consultants estimate that some 7,000 positions have been moved abroad since 2016, compared to forecasts of up to 200,000 job losses before the vote. Around 1.1 million people work in financial services in the UK.
“There has been no fundamental change in the role of the city,” Gray says.
A source on a Wall Street bank says it would be much better if the lender could keep everyone in London. “It’s better from a capital standpoint and better from an organizational standpoint.”
The implementation of the policy has also been accidental. While some US banks had European banking licenses before Brexit, others were regulated as investment firms.
The source of the Wall Street giant, who had a banking license, said he has already moved to the mainland everyone the ECB was asking for, but others who did not have licenses are crawling.
This has led some companies to hunt down the talent of rivals, as they can still offer employment in London when other banks have to move to the mainland.
The source added: “There are no fair conditions at the moment.”
Since Brexit, the City Council’s relationship with the EU has not been high on the Government’s list of priorities and has largely been left to its request. Some of the largest banks spent more than £ 100m to prepare for the exit from Britain, making Westminster content self-sufficient.
As regulators on both sides continue to work together, the political relationship has stalled. A memorandum of understanding to create a closer alignment between the City Council and the EU, agreed in principle, has been left in the dust for more than a year.
“It doesn’t look like a breakthrough is imminent,” EY’s Pilgrim says with a smile.
Victoria Hewson, head of regulatory affairs at the Institute for Economic Affairs, says the EU’s “protectionist” move to attack the Square Mile will cause self-harm to the bloc.
“The financial services sector really benefits from being able to access the city, especially its clearing markets,” he says. “It is a world leader, and even if access is difficult, it is just as likely to boost business in New York and major centers in Asia. Therefore, the measure will not even serve the protectionist goals of EU “.
The icy relationship between the two sides was characterized in a speech by Andrew Bailey, governor of the Bank of England, last September when he unusually disrupted Brussels’ clean-up plans.
Bailey said: “If they want to make a decision to break [clearing] system, it is important to take into account the risks to financial stability that fragmentation entails. That’s not idle, “you’d say, right?” from the UK central bank: this is a real threat “.
McGuinness has embarked on a takeover that has so far garnered few rewards. While he may be keeping an eye on his future political career, his efforts to strengthen the financial services sector so that he acquires the EU seem to have generated more headaches than results.