As temperatures hit record lows in February, London is still feeling the cold from a string of January Brexit setbacks.
Fewer than a third of senior decision-makers see London as today’s world financial leader, according to this year’s Global Regulatory Outlook by Duff & Phelps, published this morning.
This is a 22 per cent fall since 2018, D&P found, receiving input from 250 senior executives working in financial services across banking, asset management, hedge funds, private equity and other market participants.
As the transitional aftershock settles in, how well-positioned is the City to turn the tide and profit from its new horizons? Here are the challenges standing in its way.
Carbon futures trading
For the first time last month, the UK’s departure from the EU took full effect and the City lost its European share trading crown to Amsterdam.
The move followed more than €6bn a day of euro-denominated share trading that had already left London for the Dutch capital and Paris.
ICE, one of the main exchanges of the currency, saw relocating as a no brainer as it avoided the cost of setting up a new Brexit hub in the EU.
The setback came as several UK business leaders described Brexit as a bigger economic problem than the Covid-19 pandemic.
London-based Rick Smith, managing director of financial advisory Forbes Burton, told City A.M.: “Brexit is a real concern for many companies.
“The deal has indeed been done, but we are only now finding out what the fine print was and what this might mean for business.”
As the dusk settled over January, Brussels announced that US clearing houses will be allowed to operate throughout the EU.
Clearing houses act as an official go-between for buyers and sellers of derivatives contracts to ensure financial stability.
London’s divisions have dominated in the EU, but access is due to end in June 2022 without a further extension.
The move to allow American competitors to operate in the bloc could clear the way to locking out the UK’s clearing houses next year.
However, Bruno Fatier, financial services solicitor at Keystone Law, argues that London cannot be replaced overnight.
“The timing of the loss will depend on how hard private players, especially in Germany, less so in France in my view, are working behind the scenes to build a platform capable of replacing London as the epicentre of clearing in Europe and for the euro,” Fatier said.
Trading in euro-denominated swaps has dropped by nearly 30 per cent since the end of the Brexit transition period on 31 December.
Euro swaps trading in the City of London made up just over 10 per cent of the overall market last month, compared to 40 per cent in July of last year.
Most trade has shifted to New York, Amsterdam, and Paris, as EU platforms made up a quarter of the total euro market compared to only 10 per cent last July.
The figures, released by financial research company IHS Markit, rubbed salt in London’s wounds.
However, some City insiders believe the lack of an EU-UK equivalence deal could help the City appeal to global players including Hong Kong and Singapore.
The EU’s financial services chief fired up the City’s battle to maintain a strong relationship with the bloc by warning the UK “there cannot be equivalence and wide divergence” in financial regulation.
Mairead McGuinness said equivalence decisions would only be made after the signing of a memorandum of understanding between the two sides by the end of March.
McGuinness likened the memorandum draft to what the EU has with the United States, dampening any remaining hopes that the UK could be granted blanket equivalence.
Some believe the UK is better off without hard equivalence arrangements, enabling the City to steer towards becoming a global financial hub, not just a European one.
Barclays boss Jes Staley believes Brexit gives the UK the opportunity to define its own financial future and remain competitive with markets outside of Europe.
“I think what London needs to be focused on is not Frankfurt or Paris – it needs to be focused on New York and Singapore,” he said.