If you're a trader who's fearful about being moved to Frankfurt or Paris come November 1st, you may yet be offered a reprieve. While banks are busy preparing EU offices for what threatens to be a hard Brexit, clients are not playing the relocation game as planned.
So say lawyers who've been working with banks on their relocation plans. "Banks have been in limbo with regulators wanting them to move on, but clients not happy to move from dealing with London," says Chris Bates, head of the financial regulation practice at Clifford Chance. "Where regulators would have liked banks to have used the [Brexit] delay wisely and to start dealing with clients from the EU, this hasn’t been possible, because banks have been dependent upon third parties with their own preferences.”
No bank has said that clients don't want to trade with its European entity explicitly, but Barclays alluded to the potential for a problem when it reported its second quarter results last month. "We built all the control systems necessary. We moved the necessary people. And then over the last couple of months, we've gone to the client migration process and sort of left it up to clients if they wanted to migrate from one platform to another," said Barclays CEO Jes Staley on the recent second quarter call. Staley added that moving clients had gone "quite well," which doesn't suggest a resounding success.
Barnabas Reynolds, global head of the financial services industry group at law firm Shearman & Sterling, has long argued that Brexit won't be as detrimental to the City of London as people suppose. "Utimately the customers will come to the market where the prices are best," says Reynolds. "So long as the UK is competitive and has the best liquidity and spreads and pricing people will come to us. That is all that matters."
The European Central Bank (ECB) may, of course, have a different opinion. In its recent spat with Switzerland, the European Union prohibited Swiss traders from trading Swiss stocks outside Switzerland and European investors from trading Swiss stocks (including big names like Nestlé or pharmaceutical group Novartis) in the EU under pain of up to three years in prison. This may help focus clients' minds come November 2019.
Even so, trading jobs may not move immediately - if at all. The European Central Bank hasn't entirely ruled out the possibility for 'back to back' trading, under which trades in the EU are duplicated and booked in London, such that London traders carry most of the risk.
“The ECB still says it doesn’t favour business models that depend upon back-to-back trading and that it expects EU-based banks to be able to manage their risks locally, but this doesn’t mean that they are ruling out back-to-back trading altogether," says Bates. "What we are seeing in practice is that non-EU 27 headquartered banks are negotiating arrangements which transition them to a fully reliant local model over time." Each bank has a different arrangement, says Bates: "It’s become clear that the ECB is talking to banks individually."
Even after banks have transitioned as much trading as possible to EU subsidiaries, back-to-back trading to London is unlikely to die out. The practice is an integral part of the global financial system, notes Bates: "For the ECB to ban it would be idiosyncratic."
For this reason, traders should always have a home in London - including those working with European securities. Reynolds says back-to-back trading, "will always be allowed because it’s part of the functioning of global markets." London traders will not be displaced, he adds confidently: "No one has artificially crated a global financial centre in the past 400 years.
Photo by Kevin Grieve on Unsplash
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