Brexit: City of London Maneuvering to Maintain Control over Derivatives Trade
The Economist ran an article on Dec. 28 evaluating what the Brexit deal will mean for the financial interests of the City of London. The conclusion is indicated in the headline: “The City of London Does Not Yet Know What Brexit Will Mean. The likely answer: damage, but no disaster.”
Financial services were never included in this first agreement (cf. SAS 52/20), and that, according to the London weekly, “leaves a big question-mark hanging over the City, London’s financial district. It must now wait until January or later to learn what degree of market access its firms will enjoy in the EU in the future.”. In 2018, about one third of EU capital markets activity took place in Britain, it notes, which is about twice the share of the next-highest member, France. The City now handles 90% of the EU’s OTC derivatives transactions, and 84% of all foreign exchange trading.
Under Brexit, it is expected that London will lose its “pass porting” rights, which allows any EU financial firm to carry out its services in any other EU country with no regulatory barriers, but will be granted “equivalence” rights. As of now, Brussels has only agreed to extend temporary equivalence rights, in the areas it “considers crucial for its own financial stability, such as clearing (the centralized transfer of funds and ownership in securities trading). It has, for instance, agreed to an 18-month extension of current arrangements for European banks using London-based derivatives clearing-houses, beginning in January.”
How much will that hit the City? While some 7,500 jobs have been transferred from London to EU financial centers, The Economist notes, that is still far less than the 50,000 initially predictied. And although other centers such as Frankfurt and Paris are competing to take over from the City, “it is hard to see any one of them rivalling London in the short to medium term.” The article concludes: “Although the final financial arrangements have yet to be agreed on, it is fair to expect that Brexit will on balance be bad for the City, but not a disaster.”