Even as Philip Hammond, UK chancellor, pushes the case for a transitional deal after Britain leaves the EU, some of London’s biggest trading venues are stepping up their Brexit back-up plans.
The decision last week by MarketAxess, one of the largest bond trading platforms, to use Amsterdam as a new EU base is likely to be followed by similar announcements from rivals. This week, MUFG, the Japanese bank, said it plans to choose the Dutch city as its new EU base for investment banking.
The City of London is by far the EU’s biggest hub for trading in shares and bonds, making it the home to dozens of specialist electronic marketplaces. They include equity venues such as the London Stock Exchange Group’s Turquoise and UBS MTF, fixed income platforms run by Nex Markets, Tradeweb as well as interdealer brokers such as TP ICAP and BGC Partners.
During the past 15 years, dozens of trading venues have relied on the UK’s passporting rights for access to markets in Europe from London. Since Britain voted in June, 2016 to leave the EU, most have held off making a final decision on their plans, looking for clarity on the future legal relationship with the EU.
However, that ability to wait is coming to a close, the companies say. “Given the limited amount of time, we have to start moving into contingency planning now,” says Rick McVey, chief executive of MarketAxess.
KPMG, the professional services group, says September is the last chance for companies to begin setting up an EU subsidiary. They are now scrambling to find complimentary continental operations or reinforce existing operations in the EU countries.
The pressure on London-based trading venues intensified last month after the European Securities and Markets Authority sought to prevent UK-based institutions from running so-called letter box operations in which companies simply run shell operations in the rest of the EU and then direct business back to London.
Steven Maijoor, chairman of Esma, argues that the guidelines, which were aimed at EU countries vying to capture business from London, did not set new European standards for the UK’s departure “but rather apply existing legislative and supervisory practices”.
For the trading venues putting contingency plans into action, hiring new staff for European subsidiaries is the priority. Their names are submitted as part of the EU regulatory applications, which could take about nine months to process. Customer contracts will need to be updated to reflect any business that is booked via a new legal entity.
As the preparations for Brexit intensify, setting up EU operations may mark the start of a more formal divergence between the UK and European markets. From January, new European rules set tougher standards for its investment firms accessing overseas markets, such as the US, Singapore or Japan. When Britain leaves, Brussels will have to judge that British market regulations are also “equivalent” to EU standards.
This leaves the trading venues in a Catch-22 situation. A decision on equivalence can be made only after the UK has left the EU, but absent a formal legal transition agreement, trading venues must be fully compliant from the day the Britain leaves.
Lawyers argue that much will depend on Esma’s ability to apply its own guidelines across the EU27. If they become too onerous, venues may stick with the UK.
“It would cost Europe a lot to force these issues,” says Alasdair Haynes, chief executive of Aquis Exchange, a UK share trading venue.
“Look at France wooing everyone to Paris, and yet they are pushing these issues with Esma. Do the German companies whose cost of capital will rise really want this? Perhaps some of them would move to London if the cost of raising money becomes too high,” he says.