Clearing houses – middlemen in derivatives trades between banks – have become a key post-Brexit battleground. The Commission has twice been forced to back down and extend UK clearing rights for the EU’s banks and money managers due to fears around financial stability.
The City’s € 660 trillion (£ 563 trillion) clearing market is by far the biggest such center in Europe, handling around 90pc of euro interest rate derivatives in a business eyed by rivals including Paris.
The EU has vowed to punish banks that fail to shift lucrative clearing business to the Continent and insisted the temporary extension allowing them to trade through London will not be extended beyond 2025.
That threat, which includes the prospect of higher charges for companies that fail to comply, has not been well received by Europe’s banks.
Its biggest banking lobby groups are all staunchly opposed to the planned reforms, with the European Banking Federation (EBF), its most powerful banking association, saying the plans would cause “serious market disruption” and “significantly weaken the attractiveness and competitiveness” of EU clearing houses.
The EBF, which is led by Santander chief Ana Botin, warned that international clients “will move their entire capital markets business (not only the clearing business) to non-EU institutions” if the Commission pushed ahead with its “forced relocation” plans.
Experts also warn that creating a rival market to London’s will be mired in difficulty. 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 clearing market. These markets require liquidity and the EU does not have the depth and breadth of liquidity that exists in London. ”
He also warns it could potentially increase costs and risk for companies, adding: “No firm would want to have to move clearing activity if they did not need to.”
Andrew Pilgrim, head of government and financial services at EY, agrees. “Clearing is a sticky activity,” he says. “The EU does not want to outsource its clearing to a third country, but creating a market similar to the UK’s is very difficult and there are no simple answers. There is not a huge desire from the industry to [shift activity to the Continent]. ”
Another policy that has riled international banks operating in both jurisdictions is the European Central Bank (ECB) ‘s so-called desk-mapping review. Eight banks were last month ordered by the ECB to relocate staff out of London to the likes of Paris, Frankfurt and Dublin.
The central bank identified 56 groups of traders it said should be doing their jobs from within the EU following a lengthy investigation into whether institutions are seeking to dodge post-Brexit rules.
But, again, the power grab has caused friction. US banking bosses plan to voice concerns to the ECB in the coming months about the forced relocations, with one executive saying the move will cause less efficient and effective risk management.
PwC’s Gray says this is clearly not something banks would choose to do, but they will have few other options if it is a required regulatory step.
He points out there are more people now working in London’s financial services industry than before the 2016 Brexit referendum, given the buoyancy of the industry in recent years, adding that “mass waves” of relocations have not happened.
Consultants at EY estimate around 7,000 roles have moved abroad since 2016, compared to forecasts of as many as 200,000 job losses before the vote. About 1.1m people work in financial services in the UK.
“There has not been a fundamental shift in the role of the City,” Gray says.
A source at one Wall Street bank says it would be much better if the lender could keep everyone in London. “It is best from a capital point of view and best from an organizational point of view.”
Implementation of the policy has also been haphazard. While some US banks had European banking licenses prior to Brexit, others were regulated as investment firms.
The source at the Wall Street giant, which had a banking license, said it has already moved everyone to the Continent that the ECB demanded, but others who didn’t have licenses are dragging their heels.
This has led to some firms poaching talent from rivals as they can still offer jobs in London when other banks are required to shift to the Continent.
The source adds: “It’s not a level playing field at the moment.”
Since Brexit, the City’s relationship with the EU has not been high on the Government’s priority list and has largely been left to its own devices. Some of the bigger banks spent more than £ 100m to prepare for Britain’s departure, making Westminster content they can look after themselves.
While regulators from both sides are continuing to work together, the political relationship has stalled. A memorandum of understanding to create closer alignment between the City and the EU, agreed in principle, has been left to gather dust for more than a year.
“It doesn’t feel like a breakthrough is imminent,” EY’s Pilgrim says with a smirk.
Victoria Hewson, head of regulatory affairs at the Institute of Economic Affairs, says the EU’s “protectionist” move to raid the Square Mile will cause self-harm to the bloc.
“The financial services industry really benefits from being able to access the City, especially its clearing markets,” she says. “It’s a global leader and even if you make it more difficult to access, that is just as likely to drive business to New York and major hubs in Asia. So the move won’t even serve the EU’s own protectionist goals. “
The frosty relationship between the two sides was typified in a speech Andrew Bailey, governor of the Bank of England, gave last September when he uncharacteristically tore into Brussels’ clearing plans.
Bailey said: “If they want to take a decision to break the [clearing] system up, it is important to consider the risks to financial stability that come with fragmentation. This is not an idle, ‘you would say that, wouldn’t you’ from the UK’s central bank: that is a real threat. “
McGuinness has embarked on a power grab that has so far reaped few rewards. While she might have one eye on her future political career, her efforts di lei to strong-arm the financial services industry into embracing the EU appears to have created more headaches than results.