UK liquidity will romp home, whilst EU fumbles with taxes and massive regulations

There has been a tremendous amount of clamor in all areas of the capital markets business across all major centers from New York to London, and Singapore to Sydney in recent years concerning the need for global regulators to be able to understand what has now become a borderless electronic financial market.

Much of the concentration of attention in our sector has centered on the implementation of new directives which are aimed squarely at the FX and electronic trading business such as the European Securities and Markets Authority (ESMA) and its infrastructure directives such as MiFID II which covers trade execution and reporting, however there are some new and extensive over-reaching initiatives by continental regulators that are now beginning to be of great significance.

One particular ‘think tank’ that is gaining ground is Eurofi, which is a not-for-profit organization that was created as long ago as 2000 and is currently chaired by former IOSCO chairman David Wright who succeeded Jacques de Larosière as Chairman in April 2016.

This particular bureaucratic think tank may not be new, but its dialog on the potentially fragmented relationship between capital markets in Europe and the United Kingdom is.

As the EU’s largest capital market, the UK, continues to bumble over the decision on what form of Brexit it wishes to pursue, which will likely cause structural disruption to mainland Europe’s capital markets and strengthen the UK’s, Eurofi held its conference in Bucharest, which heralded discussion on how the EU is planning for the worst, while still hoping for a better outcome than a no-deal Brexit scenario.

At the conference, Simon Lewis OBE, CEO of the Association for Financial Markets in Europe (AFME) observed “At a time of such change and uncertainty, the incoming Commission must breathe new life into the Capital Markets Union (CMU) project. There is universal agreement that Europe needs deeper capital markets to increase financing in the wider economy and to provide a broader range of funding options for businesses to invest, innovate, grow and create jobs.”

“Steady progress has been made on the project during the Juncker Commission, but the next phase needs to be even more ambitious. Now that the CMU’s foundations have been laid, the question on policymakers’ minds is, what next? Certainly, advancing the CMU won’t be without its challenges. But there is clear commitment from the French and German central banks and finance ministries” reported Mr Lewis.

“While Brexit may have slowed down some of the project’s implementation as attention has inevitably shifted towards managing the future relationship with the UK, it certainly won’t derail the project. In fact, the case for the CMU is stronger and more urgent than ever as other European cities such as Paris, Frankfurt, Madrid, Milan and Amsterdam step up to play an enhanced role in funding Europe’s future economic growth” he said.

Just four years ago, there was a substantial amount of discourse mounting in London with regard to the European Union’s predilection for the intrinsically socialist Tobin Tax on transactions that are placed in trading financial instruments.

That has now gone completely quiet, as Britain opposed it on principle and has managed to fend it off, however in 2013, eleven European Union member states, all of which were led by left-wing governments, announced their wish to move ahead with introducing a financial transactions tax.

At that time, the nations – which include France and Germany – intended to use the tax to help raise funds to tackle the debt crisis, and the tax had the backing of the European Commission which was reinforced after the 2014 election the highly unpopular Jean-Claude Juncker as President.

The other countries that wished to introduce it were Italy, Spain, Austria, Belgium, Greece, Portugal, Slovakia, Slovenia and Estonia, all nations with absolutely no place in the world’s highly advanced financial markets economy. Greece’s government accountants, when not asleep for half of the day, cannot tell the top from the bottom of their balance sheets, Italy is rife with corruption, Portugal is agrarian, Belgium has invoked outright bans of retail electronic trading instruments and Slovakia, Slovenia and Estonia have absolutely no Tier 1 bank presence.

Now, with the European markets going it alone and with the prospect of a no-deal Brexit, which is probably the best option for British capital markets participants, allowing them to forge interference-free relationships with bona fide partner nations such as Singapore, the US, Hong Kong, Australia, South Korea, and South Africa, and various emerging markets outside the EU in other regions of the world, the mainland European market participants that viewed London as the best place to conduct their investment banking and trading divisions may well now be encumbered by the socialism that blights their homelands.

It is all very well utilizing think tanks such as Eurofi to drum this message home, however in the end, business is sensible and will opt to establish independent business units in London and then approach the rest of the world from the world’s financial markets capital, free from taxes on transactions, and European regulatory wrangling which stifles the entire business.

Thus, the fragmentation of liquidity between EU and UK will likely widen, and an increase in focus on London by European investment banks and liquidity providers could occur.