The Brexit deal leaves the future uncertain for financial services — here’s what is at stake

Britain formally left the European Union’s trade bloc on Dec. 31, marking a new era for the U.K.-EU relationship. After months of wrangling, new rules for trade were finally agreed just days before the year-end deadline. But in a document spanning over 1,200 pages, there was very little mention of financial services: a sector which accounts for 7% of the U.K.’s economy and 10% of its tax receipts.

One particular issue that arises is the clearing of euro-denominated derivatives. The size of the European derivatives market topped 680 trillion euros (4 trillion) in 2019, and the majority of European clearing activity takes place on London-based exchanges such as LCH.

So far, the European Securities and Markets Authority has agreed to roll over current clearing arrangements for these derivatives until June 22, giving more time for EU-based institutions to decrease their reliance on the British-based clearers. It has previously said it wants euro-denominated derivative trading to only take place within the EU, or somewhere with “equivalent” regulations.

The two sides have committed to releasing a memo of understanding within twelve weeks that will give further clarity on these equivalence rules. They are especially important for the financial industry as they enable U.K.-based companies to sell services into Europe, as long as the regulations don’t diverge substantially from Brussels.

The current arrangement allows for the EU to withdraw equivalence rights for U.K. institutions with only 30 days’ notice, a decision that the U.K. has no right to contest.

The approach so far has been piecemeal and on a temporary bilateral basis. For instance, Italy on Sunday announced that it is allowing U.K. financial companies to keep operating as they are in the country for another six months.

Leaving it up to each individual regulator to make arrangements has also complicated the setup on the ground. Many U.K-based banks have moved personnel covering the Dutch, French, Spanish and German markets to the continent, while those covering Italian and Scandinavian markets have been able to remain in the U.K.

The loss of “passporting” — or the ability to trade freely — post-Brexit also means that the days of financial advisors being able to fly in and out of Europe to operate have come to an end. This has prompted many senior staff to relocate to other European hubs such Frankfurt and Paris, the latter being attractive because of the prospect of lower income taxes.

The Brexit deal leaves the future uncertain for financial services — here’s what is at stake, CNBC, Jan 5