Europe’s financial sector has reached a ‘peak of uncertainty’ as regulators and banks scramble to avoid the harshest effects of the UK’s exit from the single market just 36 days from the end of the period. Brexit transition.
A combination of policies around trade talks, EU concerns about Britain deviating from continental rules, and pressure from Europe for greater control of euro-denominated activities have left the sector faced with unanswered questions about its operations after January 1.
With both sides refusing to cede ground on vital issues and financial services left out of scope for Brexit talks, leaders fear lack of clarity could lead to market dysfunction and increased costs for clients after a year in which the coronavirus has taken its toll.
“This is the peak period of uncertainty,” David Schwimmer, managing director of the London Stock Exchange Group, told the Financial Times.
“It looks like the EU will make sure Brexit comes at a cost, but it’s really important for global businesses to be able to participate in the bigger markets,” he said. “Less fragmentation and more cooperation and continuity of service are in everyone’s interest.
Unlike most other major economic sectors, the financial services sector has been largely excluded from trade talks over future UK-EU relations, despite its importance to the UK and European economies. The EU has rejected UK proposals to include a detailed chapter on financial services, covering issues such as regulatory cooperation, in any trade deal, arguing this could turn into a UK attempt to retain market access through the back door.
The exclusion means banks, stock exchanges and other parts of the City – as well as international lenders with business outposts in London – are relying on a series of last-minute ad hoc arrangements and changes.
“Some firms already have plans in place, but there are many who believe something will happen at the last minute,” said Sam Tyfield, partner at Shoosmiths law firm in London.
Goldman Sachs announced on Tuesday that it will set up a hub in Paris for Sigma X, its private marketplace for stock trading, to ensure it can continue to trade European stocks in the event of a disagreement. .
On the same day, the property investment fund Segro carried out a double listing of its entire capital on Euronext Paris in order to protect its holding structure after the end of the Brexit transition period.
These contingency plans were announced the same week that European regulators also finalized a late change aimed at avoiding chaos in £ 15bn of derivative contracts held between UK and EU counterparties.
Fearing Britain would look for ways to preserve the benefits of the single market after Brexit, the EU insisted that the future relationship be based on market access rights, known as equivalency decisions , which each party would grant unilaterally. It’s a system the bloc uses with other financial centers such as New York and Singapore.
However, Brussels has remained silent on the equivalence decisions that the City can expect to obtain. EU officials recognize that while equivalence is formally separate from talks on future relations with the UK, the two issues are politically linked. Brussels is deeply reluctant to show its hand as trade negotiations are indecisive, not least due to the complicated politics of acting as the fate of sensitive EU sectors, such as fisheries, remains in doubt.
“What many fear in the city is the ill will created by collapsing without a deal,” said Ghost Town Minister Pat McFadden. “Agreement or no agreement, for them it’s really a question of goodwill because they depend on it for access [to European markets]. “
The European Securities and Markets Authority said on Wednesday it would not ease EU rules for parts of the derivatives market, despite the possibility that they could leave London outposts of banks in the EU unable to negotiate. Esma and the UK’s Financial Conduct Authority said the issue could be resolved through equivalency decisions, but that was outside their purview.
“For the European banking sector, this is not the end of the discussion, but we knew the solution would not come from Esma,” said a senior executive at a European bank. “It will go over. We expect to hear something concrete from the European Commission towards the end of the year.
The EU has also repeatedly warned of the difficulty of assessing UK equivalence given the dynamic situation created by Brexit, in which Britain has made it clear that the goal of exiting the EU The EU was to free itself from European rules.
Some are urging the UK to embrace the divergence and roll back some of the more prescriptive rules introduced in Europe after the financial crisis.
“The reason we’ve been investing in the UK for so long is because it’s the center of global markets and UK regulators fully understand the importance of frictionless access,” said Ben Jackson, Chairman of Intercontinental Exchange.
“The UK has the opportunity to stand up and focus on what has made their market successful, which is principled regulation,” he said.
Additional reporting by Owen Walker in London
Letter in response to this article:
Don’t rely on post-Brexit data feed access / Elizabeth Denham, UK Information Commissioner, Wilmslow, Cheshire, UK