The EU sets out its position

Almost one month into 2021 and we are no closer to negotiating a deal with the EU over the future relationship between the UK and European financial markets.

Indeed discussions have yet to begin, despite this being one of the most important trade issues that the UK faces post-Brexit.

Whilst it’s not been made clear exactly why the two sides have yet to sit down at the negotiating table, real or virtual. We have been able to gain some further insight into the European Union’s stance on key issues.

That insight came courtesy of comments made by the European Commissioner for Financial Stability, Financial Services and the Capital Markets Union, Mairead McGuinness, to the European Parliament.

Speaking about the future relationship in financial services between the UK and the EU the commissioner said that: “What we envisage for this framework is similar to what we have with the United States, a voluntary structure to compare regulatory initiatives, exchange views on international developments and discuss equivalence related issues”

In theory that’s a system that UK financial markets could live with. However, it now appears that before we can even begin to discuss those future arrangements we will first need to agree on what Mairead McGuinness referred to as working arrangements.

Addressing MEPs the commissioner said that: “Once we agree on our working arrangements, we can turn to resuming our unilateral equivalence assessments using the same criteria as with all third countries, including anti-money laundering and taxation cooperation”.

Turning to the possibility of the UK deviating from, or changing some EU financial services rules, she added that “The United Kingdom intention to diverge requires a case-by-case discussion in each area. Equivalence and divergence are polar opposites”

However, her comments did end on a more upbeat note when Commissioner McGuinness said “I am optimistic that over time, through cooperation and trust, we will build a stable and balanced relationship with our UK friends”

Mairead McGuinness is a career politician and EU insider and was nominated for her post on the commission, by none other than Ursula von der Leyen the European Commission’s President.

Leaving the EU without a deal on financial services is beginning to have real world consequences for UK businesses, although London is and will always be the global center for the FX industry and institutional trading, as well as home to the vast majority of Tier 1 FX dealing at bank level, hence a global audience is to be looked forward to.

TP ICAP, the worlds largest interdealer broker warned yesterday that it has been prevented from servicing all of its EU clients as it has not been able to complete a planned relocation of staff to Paris, because of delays caused by COVID-19.

European regulators have denied the firm permission to use its London operations to facilitate business for those customers, in the transitional period until its Paris offices are fully staffed and operational.

This another example of the hard-line attitude that the EU is taking these type of issues.

TP ICAP had previously believed that it would be able to continue to service all EU clients from London on a temporary basis. Views that it published as recently as January 7th in a prospectus linked to a fundraising and issue of new shares.

The UK’s negotiating team will need to try and cut through the bureaucracy and political posturing of the EU on UK financial services and will need to do that as quickly as possible. Or else be faced with protracted discussions about inconsequential issues that will inevitably delay far more important talks about the reinstatement of the equivalency between the UK and EU in the financial markets.

One short sighted opinion from across the Channel is the supposition that the European Union’s hopes of bringing London’s financial markets sector to the mainland is as easy as taking business from London to Europe.

It is not that simple, as it would be impinged by approximately 8,000 miles of fiber optic cables which emerge from the seas around the UK at locations such as Crooklets Beach and Sennen Cove in Cornwall, and Highbridge in Somerset.

These cables carry data not only across the UK but to its continental neighbors, and whilst the European Central Bank is correct in suggesting that the majority of Europe’s critical infrastructure for trading FX, as well as shares and derivatives, is clustered in a 30-mile radius around the City of London, and that regardless of the UK’s future, some of the industry’s biggest data center operators, which host banks and high-frequency traders’ IT equipment, have announced capacity increases this year to cope with rising demand from investors in both Asia and the US, the real reason is not just infrastructural, it is really around why that level of infrastructure exists only in Britain and not elsewhere in Europe.

Britain’s interbank sector is responsible for 49% of all global FX order flow at Tier 1 level, and consists of British and international banks based in London, marking out London as a true free market, with no controls on which banks and non-bank entities (Thomson Reuters, Currenex, Hotspot all have centers in London) operate there, yet that is the de facto center for electronic trading and always will be.

Add to this the matter that the vast majority of FX clearing for the global markets is conducted by LCH.Clearnet in London and that the talent base for the world’s capital markets industry resides in the UK, it is not as cut and dry as the politicians may make out.