The UK and the European Union must stop focusing on post-Brexit divergence and convergence and re-align their interests to tackle stagnant flows in Europe in comparison with the US and Asia.
That was the key takeaway from the FIX conference that took place in Paris earlier this week. Since their split at the start of 2020, Europe and the UK have been focused on emerging as the victor of Brexit with home of the European financial hub to be in either the City of London or Paris.
However, at what cost? As noted by panellists and audience members on Tuesday, the more important conversation to be had is how to boost volumes and liquidity in Europe. In a live poll asking whether regulatory change could devastate Paris or favour London in the coming years, around 72% of the audience voted no. In other words, it’s not a zero-sum game to be won.
The thing that will likely devastate Europe if not taken in hand is the level of fragmentation in the region – made worse by Brexit – and the stunted growth it has seen in the last few years. Unlike the US and Asia, Europe has produced stagnant volumes year on year, driven by several macroeconomic factors and a suffering IPO market.
Contributing to this lack of liquidity is the fact that a growing list of firms are now competing for a portion of a pie that itself is not growing alongside said list. Market structure in the US and Europe is starkly different. Europe has three times the number of exchanges, 10 times the number of listing venues and 20 times as many post-trade providers.
Speaking to this, Simon Dove, managing director, head of liquidity at Instinet, said: “The challenge in Europe is that while competition has been positive it has also driven fragmentation which can make us less attractive versus the US and Asia. At the moment we’re all talking about volume – how do we get more volume?”
Brexit has created additional frictional cost for a market that is already struggling. And the EU and UK firms must create a game plan as to how to grow the region together as opposed to continue fighting over the remaining scraps.
“It’s a big world,” Simon Gallagher, head of global sales at Euronext and chief executive of Euronext London, told The TRADE. “There is interest in the UK and Europe as neighbours as we compete against the US and Asia. It’s a realisation on both sides that we need each other and need to get creative with a symbiotic relationship. It’s the last thing Europe needs, putting extra frictional cost into the system.”
Brexit – the good and the bad
The UK’s departure from the European Union, while costly thanks to the need for duplicated services to support European clients, has also had some relatively positive impacts on the way that firms on either side of the channel operate. The conclusion – it’s not been as bad as everyone thought it was going to be from a trading perspective.
“From a trading perspective, the markets were well equipped [for Brexit],” said one individual who wished to remain anonymous. “The situation is less drastic than we expected. Not much has changed, apart from perhaps the way some firms communicate with the sell-side.”
While many predicted the impacts of Brexit could have been catastrophic, the reality is that financial services in Europe were previously skewed too heavily towards the City. Many participants have subsequently suggested that the spreading of volumes to new centres such as Paris and Amsterdam have in fact future-proofed the resilience of the markets.
“The benefit for the overall industry is that we’re more resilient. We have two financial centres instead of one,” said one panellist.
Also noted during the Paris FIX conference, was the suggestion that many European firms were appreciative of the increased on the ground and local coverage that Brexit had enforced. Some individuals called it the natural next step for markets.
“Financial services were over-centred in London. Clients appreciate that firms have more local coverage,” said another panellist. “Having an extra step between Paris and London is another link in the chain. The way the desk is set up you have the same methods of communication whether you’re in a different room or different city. Nothing has really changed; there hasn’t been a duplication of roles.”
That is not to say of course that Brexit has been all roses. Thanks to the requirement for European firms to be serviced by European entities, institutions have been forced to duplicate their operations on the either side of the channel. While this hasn’t necessarily resulted in the duplication of personnel and roles it has meant a duplication of implementation costs, a moving of infrastructure into the Bloc and increased cost around connectivity and compliance with regulation.
This unsurprisingly has proved to be an expensive and arduous process and has created an environment where larger firms that can shoulder the cost more easily have thrived, perhaps even sparking some of the consolidation seen in the last few years.
It is also likely to encourage further outsourcing. Noted during a panel exploring consolidation and competition during FIX Paris, was a recent piece of research that found that 20% of firms in Europe had outsourced part of their dealing activities and a further 20-25% were exploring doing so.
“Brexit created unnecessary costs for end investors. There is a cost attached to implementation decisions made post-Brexit and this favours larger players,” said one individual.
Read more – Carrot or stick? How the EU plans to reduce reliance on UK CCPs for derivatives clearing
One part of the post-Brexit tussle that does have the potential to hamper institutions is the proposed active clearing account mandates suggested by EU regulators at the end of 2022. In December, the European Commission published a proposal as part of Emir 3.0 regulation that would require all participants to hold active accounts at European CCPs for clearing at least a portion of certain derivative contracts.
The decision has been argued against by many institutions and trading associations who claim the move will hamper competition in Euro-denominated products by encouraging participants to take certain “uncompetitive” prices just to meet a minimum threshold of activity.
“The mandate to clear on EU houses will bifurcate liquidity in cleared swaps,” said one individual at FIX Paris on Tuesday. “That’s an attention point for us and we will be watching it carefully. It could increase costs and decrease liquidity.”
This is certainly true and something to watch. However, FIX panellists and speakers were united in their stance that further splitting liquidity between the two regions is not the answer to the problem. Brexit is not, and should not, be the problem. The issue is adding new growth and liquidity to the region. And as close neighbours, the UK and the European Union should be facing issues around global volumes as one.