For the derivatives markets, a shakeup in national or regional market integrity like Brexit is likely to have subtle effects. The derivatives business is a global market. That has not dampened the aspirations of certain politicians. Soon after the referendum, the French president, François Hollande, called for euro-denominated clearing to be relocated to the European Union from the UK.
Research commissioned by the London Stock Exchange Group (LSEG) by consultancy EY reported the potential loss of jobs in that scenario would be 83,000, according to the Financial Times, with a further 232,000 UK jobs also affected, as a consequence.
Any suggestion that euro clearing should move to mainland Europe from the UK, post-Brexit, would be challenged by two issues.
Firstly, euro clearing happens not only in the UK but currently in other territories including the US, Switzerland and elsewhere. Any move to bring it all within the Eurozone would have repercussions with those jurisdictions, including potentially hitting dollar denominated business in Europe. Secondly, it is not based on anything.
“There is nothing currently in any of the legislative texts that would suggest that you could move currency denominated trading or clearing from one jurisdiction to another,” says Ben Pott, head of European affairs at market operator ICAP. “That would have a much wider ramification as today’s euro denominated products are traded and cleared in lots of other jurisdictions.”
“Those arguments are a bit disingenuous,” says Christian Lee at post-trade consultancy Catalyst. “But potentially the EU and the UK could end up, as a result of a spat or a continued disagreement, handing business over the pond to the US.”
This is what Brexit really offers; opportunity for US firms. LSEG chief executive Xavier Rolet has previously warned that 100,000 jobs may be at risk of moving to the US. Jeff Sprecher, chief executive of US-headquartered market operator ICE described Brexit as a “driver of change and driver of opportunity”, when speaking with analysts on its third quarter earnings call.
“The UK remains an important global market centre with prudent regulation, a focus on ensuring market confidence and a strong financial services talent pool,” he said. “We're maintaining an active dialogue with officials in the UK government to help preserve the role of markets in London's futures. We're encouraged by the practical approach that the UK government is taking to carefully consider the future opportunities as an independent country.”
While he added that ICE does not think financial market infrastructure leaving London would be in the best interest of Europe's markets he acknowledged his firm had called off a bid for the London Stock Exchange Group (LSEG) earlier in 2016 based on challenges in evaluating the LSEG and the potential impact of Brexit.
“Because this important asset could be leaving the city of London, we believe that this may create new opportunities for us, as a leading infrastructure provider, as we see the ability to continue to invest in the UK,” he noted.
It seems unlikely that the LSEG would leave London if its standing proposal for a merger with Deutsche Boerse goes ahead; in the merger proposal the two firms set out that; “The Combined Group will maintain its headquarters in London and Frankfurt, with an efficient distribution of central corporate functions in both locations.”
The document was published pre-Brexit, and following the announcement of the result the six-person Referendum Committee which the two firms formed, provided further advice to the group. However there has been no sign of a change in plans.
Joachim Faber, chairman of the Supervisory Board of Deutsche Boerse and chairman of the Referendum Committee, said: “The decision of the UK to leave the EU makes it ever more important to maintain and foster ties between the UK and Europe. We are convinced that the importance of the proposed combination of Deutsche Boerse and LSEG has increased even further for our customers and will provide benefits for them as well as our shareholders and other stakeholders.”
The complexity of post-Brexit regulation hinges on the three possible scenarios under which trade may be conducted. The first option is retention of the status quo, with full membership of the single market and passport so a venue or a clearing house within the EU or UK can have participants in any of those 28 states without a problem.
At the other end of the scale the UK will be completely outside of the EU and markets or infrastructure cannot effectively service, or provide investment services to any market participants in the other 27 states, at least on the comprehensive basis. There might be local arrangements that allow them access but those would be agreed on a country-by-country basis.
Pott says, “From an investment services providers’ perspective, there is a middle way which is known as equivalence, so if your home jurisdictions are perceived to have broadly the same regulatory structure then you can register with ESMA and you can provide clearing and trading services to the whole EU. I think in the discussion it feels as if that’s probably the most likely avenue in the whole Brexit scenario.”