The Ebb and Flow of the Waters of Post-Brexit Trading

On 2nd January 2021, the result of the June 2016 referendum was enacted in the UK’s withdrawal from the European Union (EU). Despite four and a half years of procrastination followed by intensive negotiation and the genuine risk that the UK would leave without any post-Brexit agreement, a last-minute deal on trade and co-operation was finally struck.

In nearly 1300 pages, the EU-UK Trade and Cooperation Agreement provides comprehensive provisions for trade, energy, travel, transport, social security and intellectual property. It covers law enforcement, judicial cooperation and cooperation on health insurance and cyber-security. Conspicuous by its virtual absence is the financial services sector. It is representing 21% of the UK’s service exports. It appears that the complexity of finding a solution proved to be so severe. Rather than allow it to derail the whole enterprise, the negotiators simply left it to one side.

Equivalence

The hope was that the regulatory concept of “equivalence” would allow the UK supervisory regime to operate. In tandem with that of the EU, reducing overlaps and incompatibilities in compliance requirements, making the supervision of non-EU authorities acceptable in the single market. It is allowing third-country businesses to provide services without the need for a presence within the EU.

The detail of the equivalence framework is offering fewer grounds for optimism. For one thing, the EU can revoke its recognition of the equivalence of any UK regulation at just a month’s notice. Furthermore, equivalence does not apply to the taking of deposits or the granting of loans. So far, the only equivalence decision of the EU is the one for UK CCPs with a set time limit. The position of the UK sector was further weakened by the European Central Bank’s demand. They demanded international banks move assets worth USD 1.2 trillion from UK companies to their EU subsidiaries or affiliates.

Mitigation

While for UK-based banks it has been possible to decentralise banking services. Maintain UK headquarters, immediately after Britain’s formal withdrawal, more than EUR 6 billion worth of trading volume moved from London to centres in the EU. Coincident with this has been the shift of interest rate derivatives to the US. While a pan European trading exchange can ameliorate the effects of the former, it can do little to counter the losses caused by the latter.

The question is being debated among economists and within the industry. Which is the true scale of the effect on the City. While it is true that the parent companies are still based in London. There are wider issues at stake than simple questions of the jurisdiction in which profits are taxed. The UK has historically been the centre and the driving force of financial trading, developing technology, expertise. Regulatory innovation on which the EU’s model, if not the world’s, has been based. Losing that centrality means that not only is the trading flow that is leaking away from London unlikely to return. The evolving status quo means that there are fewer incentives for the EU to make any concessions to the UK.

It may be that London can survive the loss of direct trading of EU-listed shares. But the erosion of its euro-derivatives clearing business could be much more damaging. The construction of Spectrum’s pan European trading exchange for preserving a balance across the continent is a project whose time has come.