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(This article first appeared on Best Execution, a Markets Media Group publication.)
What has been the real impact of Brexit on European financial markets? This is a question that has been debated on both sides of the channel since the UK left the EU – but three years on, the answer is still unclear.
On the one hand, there is no question that the separation had an initial impact – but was it as big as expected? In 2016 PwC and TheCityUK estimated that up to 100,000 financial services job could be at risk post-Brexit, while Oliver Wyman predicted a more conservative 40,000. By 2018, thinktank Bruegel had revised this down to just 10,000 banking jobs (and 20,000 across the wider financial services industry) – and in March 2022, EY tracked the total finance jobs that had been relocated to Europe at just over 7,000.
The December 2022 Bank of International Settlements (BIS) Triennial Survey, the first since the UK’s formal departure from the EU, showed that London has remained the dominant centre for OTC trading of FX and euro interest rate derivatives (IRD), but it has lost share in euro and dollar IRD (in the latter case owing to Libor’s end rather than Brexit). In international banking, London has retained its top position, although its role as a banking hub for the euro area has waned.
In equities however, the picture is far more black and white. A recent report from ESMA confirmed that the UK’s “pivotal role” in European securities trading meant its withdrawal from the EU brought a significant drop in overall trading in 2021. EEA trading dropped to just EUR13.5 trillion in 2021 following the UK’s official departure – down from EUR25 trillion the previous year (when the UK was still included).
According to anecdotal evidence shared at FIX France in Paris last week, around 3,000 bankers ended up moving to Paris from London after Brexit, with the city one of the primary beneficiaries of the initial exodus – while Dublin and Frankfurt were other popular locations.
“It’s worked out quite well for us,” said one buy-side trader, whose firm moved a number of jobs over to Paris. “We were probably over-concentrated in London, and now we have more local coverage.”
“While the worst-case scenario didn’t actually happen, we made sure we were equipped for it, and that was important,” said another. “Actually, Brexit didn’t change the way we work as much as Covid did. The way we operate between Paris and London hasn’t changed that much, but we now have far better tools through which to communicate.”
Nevertheless, while headcount might have shifted, the balance of power seems to have remained firmly rooted in the City.
“Anecdotally, speaking to our customers, we definitely saw a transfer of traders to Paris after Brexit,” said Simon Gallagher, global head of sales at Euronext and CEO of Euronext London. “But while in the last year there has been some more pressure from the French regulator to move more compliance and back office functions to Paris, it has to be said that it feels like the decision-making power still remains firmly in the city of London.”
That’s not just the case within institutions themselves, but in terms of regulatory influence as well – with the UK’s Financial Conduct Authority (FCA) still seen by many as the market mover.
“After Brexit, it was almost as if the FCA became more influential than before,” explained Gallagher. “Suddenly and very quickly the priority of the continental regulator shifted to the EU being a competitive centre for trading venues compared to London, so we saw a greater tolerance of dark trading platforms and so on. We saw almost a convergence in the EU, paradoxically, which made the FCA even more important.”
With numerous regulatory changes now on the horizon (including the UK’s upcoming improvements to equity secondary markets, the amended post-trade transparency requirements, expected upgrades to market surveillance and reforms to the UK listing regime; along with the EU’s MiFIR review, the EU Listings Act, DORA and many more), what does this mean for divergence (or convergence?) between the two regions going forwards.
“Going forwards, I think it is unlikely that we will stray too far from each other. There will be tolerance of dark platforms and far more innovation and exploration from the FCA, and Europe will dance around that as well – I think both sides will be cautious because they don’t want volumes to shift too far,” predicted Graham Dick, market structure analyst at Aquis.
“There isn’t massive competition between the UK and EU regulators: both want to have credible and robust markets. But I do believe that certain standards, particularly data standards, should be global. We are seeing some concerning moves from regulators trying to tidy up data standards but they are not common, so they are posing significant problems for the industry as a whole. I’d like to see data standards, particularly around elements such as FIX data standards, be applied consistently, otherwise it will cause problems.”
Cooperation, not fragmentation
At FIX France, over 70% of the room at FIX France thought that the upcoming regulatory changes would neither devastate Paris or unduly favour London – with the understanding that while we’re not necessarily all on the same bus anymore, we’re still all driving in the same direction.
“Anyone who thought Macron was going to offer equivalence after Brexit was living in dreamland. It’s been handled pragmatically, as expected,” said Dick.
But at the end of the day, the priority is the destination, not the journey. “I don’t think where the trades are done should be our focus. That is not the most important thing,” said Raoul Salomon, CEO of France and co-head of markets for Barclays Europe.
“What we want is to have good execution and good competition, in order to deploy our capital most effectively for our clients. Yes, there are European regulators who will want to see more flows through their own CCPs and worry that euros could be cleared outside of the Eurozone, but overall we should have more cooperation among regulators than fragmentation.”
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