Regulation Matters – mid July 2017

Must be the silly season. As Brexodus begins, the ECB shows why markets like to be beside the seaside.

This month’s fascinating factoid: it’s the distance from the ocean that dictates your viability as a financial centre.  Who knew?  We also unpack Boris’ reaction to the Brexit divorce bill and take a look at the first signs of Brexodus.  

If you’d like to know more, you can catch up with our previous editions, or sign up to receive regular updates, call us on 020 7842 4800, contact us – or send in your comments using the form below.

Brexit billions? On your bike!

Foreign Secretary Boris ‘the Bike’ Johnson has told EU leaders that they can ‘go whistle’ over the EU Brexit divorce bill. He reckons the sums demanded by the EU – approaching €100bn – equate to the extortionate. And so as far as he’s concerned, the EU won’t get what they’ve asked for.

I am not hearing any whistling, just a clock ticking” was the response from EU Brexit chief Michel Barnier. He insists that the UK must recognise its financial obligations to the EU, as this is a question of trust.

Meanwhile, the three priorities for the first phase of the Brexit negotiations are

  • Citizens’ rights
  • Financial Settlement
  • Other Separation issues

and Barnier  has stated that these priorities are indivisible.

“Progress on one or two would not be sufficient in order for us to move on to the discussion of our future relationship.”

Arriving late to the party, Labour leader Jeremy Corbyn, SNP leader Nicola Sturgeon and First Minister of Wales Carwyn Jones may indeed need to get back on their bikes: Barnier has called time on their plans for Brexit talks, stating “Tomorrow I will meet, at their request, Jeremy Corbyn and Nicola Sturgeon and Carwyn Jones. Of course I will only negotiate with the UK Government.” 

Brexodus begins? 

Earlier this year the Bank of England’s Prudential Regulation Authority (PRA) – wrote to financial institutions requesting that they submit Brexit scenario contingency plans to the regulator by 14 July.

In the face of this imminent deadline, Financial Conduct Authority (FCA) CEO Andrew Bailey is displaying a defiant show of confidence, arguing that Brexit should not force financial institutions to move their business out of London. He has also stated that there is room for conciliation and mutual recognition between Britain and the EU, which would allow access and free trade to continue: “Firms should be able to take their own decisions on where they locate, subject to appropriate regulatory arrangements being in place which preserve the public interest. Authorities should not dictate the location of firms”.

Unconvinced, Deutsche Bank chief John Cryan has called for repatriation of functions – perhaps obviously in Deutsche’s case, to Frankfurt.

It seems banks’ typical ‘leave it to the last minute’ response to regulation is not true when it comes to Brexit.  While uncertainty continues to rage, banks are already making decisions – and maybe, actual moves.

Barclays mirrors our blogs

Looks like Barclays chairman John McFarlane has been reading Catalyst’s blogs. His stated view that the battle over London’s €1tr a day euro-denominated clearing is a political and not economic  mirrors our own position.

He’s also suggested that “If the price is shared regulatory oversight, then it is a price worth accepting”

Given the systemic importance to the continent, it is not unreasonable that EU authorities should be granted some form of oversight of euro-related activities within the UK.

But Hubertus Väth, managing director of the German financial services body – Frankfurt Main Finance – said he was not only confident that the European Banking Authority (EBA) would move from London to Frankfurt, but also confident in the arguments for bringing euro clearing from London to Frankfurt .

Markets really do like to be beside the seaside

It now appears that neither politics nor economics, not even confidence matter as much as marine geology, fibre optics and the internet.

Buried deep in a report on the international role of the euro from the European Central Bank (the very body that is seeking further control of euro clearing) it appears that undersea submarine fibre optic cables are a critical factor in determining the competitive strength of financial centres.

  • The submarine fibre optic cables laid in the late 1980s are now the principal data conduit – “the internet backbone” for data transmission.
  • They transformed the foreign exchange market by reducing latency and considerably increasing bandwidth; essential in a world where data processing needs are growing exponentially and high-frequency trading accounts for a rapidly growing share of foreign exchange trading.
  • They also provide a competitive advantage to financial centres located near oceans connected to the internet backbone, at the expense of landlocked cities like Zurich and Luxembourg.
  • Estimates suggest that cable connections have boosted the global turnover of London, the world’s largest trading venue, by as much as one-third.

Combining an ocean of advantage with institutional inertia may suggest that post Brexit relocations, if they happen at all, could be very gradual.  Even so, any assumption that it will all be plain sailing would be a very unwise move.

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