The EU share trading that flooded out of the City of London after the end of the Brexit transition is unlikely to return, banks and asset managers have warned.
The first day of dealings for the City outside the EU’s single market triggered a large shift in euro-denominated shares from London, where they are typically traded, to new venues in Amsterdam and Paris. It marked an overnight change for investors and banks who had used the UK’s membership of the EU to trade freely across borders.
Gianluca Minieri, deputy global head of trading at fund manager Amundi, said it was “a stunning own goal for the UK. And this is only the beginning”. More volume would move to where investors could get better prices and liquidity, he added.
About €6bn of shares that typically change hands in the City were traded in the EU on Monday, and a similar value on Tuesday, as investors became accustomed to the new regime. The figures equate to almost half of the amount of business that London banks and brokers would normally handle.
Speaking to the Treasury Committee on Wednesday afternoon, Andrew Bailey, governor of the Bank of England, said: “We are already seeing a certain amount of business having to migrate to the EU.”
However, he noted that the number of jobs lost in the City was lower than once feared, at between 5,000 and 7,000.
The abrupt shift had been necessary because the EU refused to recognise most of the UK’s regulatory systems as “equivalent” to its own, which forced trading in virtually all euro-denominated shares business back to the bloc. Following Brexit, Brussels is keen to assert its own sovereignty in financial services and not leave regulation of euro assets to overseas regulators.
“I don’t see this changing quickly. It’s happened, it’s done,” said Nick Bayley, managing director at consultancy Duff & Phelps and a former official at the Financial Conduct Authority. “I can’t see the EU giving equivalence in this space any time soon.
“As the market adapts, the need for equivalence wanes. Its value is diminishing with every month that goes by,” Mr Bayley added.
Brussels would not be keen to send business back, and getting trading rights from the equivalence process “will be a painful process” for the UK, said Mr Minieri.
The UK and EU are looking to agree a memorandum of understanding on future co-operation in financial services by the end of March, although hopes are dwindling that it will be an extensive agreement.
Mr Bailey said on Wednesday that he was not optimistic about a swift decision from Brussels on the equivalence of the UK’s financial services.
“The situation we find ourselves in is that the EU has said that it wants more information from the UK on what its future intentions are on regulation,” Mr Bailey said. He added that these requests were “problematic” because the UK would change its rules when it needed to and would be transparent at the time, but could not say what it would do now.
“I strongly recommend we do not become a rule taker,” he said.
The trading shift is a clear sign of how tough equivalence rulings can be to secure, and yet the exodus is unlikely to seriously dent the UK’s finances. The majority of taxes in the share trading industry are paid on the revenues the trading venues report, rather than the trades themselves. Financial services contributed almost £76bn in tax receipts to the UK Treasury last year.
Banks and fund managers also said it was unlikely thousands of trading jobs would immediately follow assets out of London, as the split had been widely expected and they were prepared.
“What we and all our peers have done in trading is making sure the core client contact is EU-based, but then the product person is still in London,” said a trading manager at a Swiss bank. “So we don’t break any rules, we just have them both on the phone with the client, but nothing in reality changes.”
The head of trading at a big UK-based asset manager said it was unlikely to make a difference to the physical location of trading teams.
“As long as the regulatory environment allows us to continue to access these markets I don’t envisage it being an issue.”
Additional reporting by Stephen Morris and Attracta Mooney
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