City of London makes late scramble to limit Brexit disruption
Companies and regulators adapt despite lack of clarity on post-December market access
The City of London.
Companies and regulators are making last-minute arrangements to avoid disruption when the UK leaves the EU’s single market next month, with Paris snagging a new trading hub for Goldman Sachs and a dual listing for FTSE 100 stalwart Segro.
The US investment bank said on Tuesday it would set up a hub in the French capital for Sigma X, its private European marketplace for trading shares. On the same day, Segro dual-listed its entire share capital on Euronext Paris to protect its holding structure after the end of the Brexit transition period on January 1st. The UK real estate investment trust has €6.2bn of assets throughout the EU.
Late on Monday, European regulators also finalised a late change seeking to avoid chaos in £15tn of derivatives contracts held between UK and EU counterparties.
The steps reflect rising anxiety over financial markets arrangements after Britain’s post-Brexit transition period expires, particularly as Brussels has remained silent on access for the City of London.
The UK government and the EU are locked in intensive negotiations over their trading relationship from January. But discussions over mutual access to each side’s financial markets are separate and covered by regulators. Much will hinge on a series of so-called equivalence decisions covering individual countries and financial products.
John Berrigan, the European Commission’s top financial services official, warned last month that the end of the transition period would be an “unavoidably fragmenting event”.
“We have to keep repeating our message to the market participants to get ready,” he said, stressing the risk of “market volatility” as the financial system adjusts.
A lack of equivalence decisions would not shut UK banks, investors and trading venues out of the EU market, but it may open up gaps and drive up costs.
Goldman said its new arrangements in Paris would help avoid disruption. “We want to ensure that our clients continue to have access to all of our key liquidity sources post-Brexit,” said Liz Martin, global co-head of futures and equities electronic trading at the bank.
The bank will keep its London presence for Sigma X, which handles about 0.4 per cent of total European share trading, but the Paris venue will allow it to reach all EU customers after the UK’s cut-off date.
Despite the commission’s reluctance to set out its plans, European regulatory agencies on Monday evening moved to make it easier to shift thousands of illiquid and old derivatives contracts from the City to the EU.
In a joint statement EBA, Esma and Eiopa, which oversee Europe’s banking, trading and insurance industries, said they would allow banks and asset managers to transfer their old open derivatives trades held in London to EU subsidiaries without triggering new regulatory demands.
The move aligns the EU with the UK, which has already legislated to allow EU banks to continue to service the contracts.
Roger Cogan, head of European public policy at Isda, a trade association, said the move was “very welcome” as it allowed banks to continue providing basic services such as amendments to contracts. “It is also helpful for market participants’ Brexit-related reorganisation efforts,” he said.
The commission has said its equivalence assessments of the UK must be “forward looking” and take into account any British plans to diverge from EU rules. Brussels has said it needs more information despite the UK government providing 2,500 pages of answers to EU questionnaires earlier this year.
EU diplomats say the union’s stance reflects a mixture of negotiating tactics, as Brussels seeks leverage in the two sides’ future-relationship talks, and a political agenda to become more independent from the City after Brexit.
In a bid to move the process forward, UK chancellor Rishi Sunak announced some equivalence decisions in November that will, for example, ensure EU-based exchanges, clearing houses and financial benchmarks can continue to be used by UK customers. But the EU made clear it had no plans to immediately reciprocate. – Copyright The Financial Times Limited 2020