Since the United Kingdom voted to leave the European Union in June 2016, Brexit discussions have focused on the term of separation and its implication for UK and EU citizens. But the nature of the UK/EU relationship post-Brexit is also hugely important, especially for financial services. With less than 180 days until the split is official and just two years until the prospective transition period ends (conditional on the two sides agreeing on the terms of separation), market participants are increasingly beginning to examine the global implications of Brexit on the capital markets and how Brexit will transform the U.S. relationship with the UK and EU.

At SIFMA’s 2018 Annual Meeting, The Capital Markets Conference, in Washington, DC, experts from the financial services industry, the UK Government, U.S. regulators and academia addressed how firms are preparing for Brexit, what still needs to be accomplished, and the different scenarios for structures of a Brexit deal, including the possibility of no deal being reached.

Financial firms are preparing for a multitude of Brexit scenarios. When asked about the potential impact of Brexit on American companies, Cathy Bessant, Chief Operations and Technology Officer for Bank of America, emphasized, “We’re amending our legal entity structures, so that we’re in the right place. We’re getting used to the thought of being regulated by new regulators, who may never have seen a company of our size before.”

.@giancarloCFTC on #Brexit: "It's going to be a rocky time"; we have no choice but to prepare for the worst and hope for the best. Hear more about Brexit and cross-border financial regulation at: https://t.co/uAaNzxsdkc #CapitalMarkets #FinReg pic.twitter.com/29oGiYyrmS

— SIFMA (@SIFMA) October 25, 2018

Speaking specifically to the impact of Brexit on American markets, the U.S. Commodity Futures Trading Commission Chairman J. Christopher Giancarlo explained, “We will stay very focused on this until the end. No question it’s going to have an impact. But overall, our markets are strong.”

The question that then remains is, how disruptive will Brexit be?

 

Hard Brexit is defined as the UK leaving the EU’s single market to gain full control over its own lawmaking, budget and immigration policies, with no established preferential access to EU markets. Our panel indicated that the single market system for financial services will not work for the UK, because it’s intrinsically tied to the free movement of people, and immigration was one of the perceived drivers of the Brexit vote.

Damian Nussbaum, Director of Economic Development for the City of London, placed perspective on this issue when he pointed out, “The gazillion dollar problem is they [EU] see it as protecting the euro and the single market system, but it’s more than just about single markets.”

Additionally, the UK doesn’t feel it’s in its best interest to be a rule taker from the EU on how to run its financial markets, given the significance of its industry on the global stage. Instead, the UK wants a bilateral treaty building on existing regulatory equivalence regimes, like the EU-Japan Economic Partnership Agreement. As Alice Campbell, Economic Counsellor at the British Embassy, said, “The UK government is planning on the basis of a deal, but it is also planning for other scenarios.”

If a hard Brexit occurs, many European firms will experience diminished market access to the UK, and reciprocally, the UK will lose preferential access to the EU. With diminished access on both sides, firms will need to have operations in other European “financial venues like Dublin, Luxembourg, Paris, Amsterdam and Frankfurt,” said Damian, but they will need to obtain appropriate regulatory approval and licenses for this to happen.

Given all of this, Jacob Funk Kirkegaard, Senior Fellow at Rhodium Group, explained that there’s a consensus “there will not be a single financial services center in the EU as dominant as London is now.” Instead, Jacob said, “Initially, some liquidity may go to these [European] cities, but they may not be equipped to handle this and then liquidity will most likely end up going outside these markets to New York, China, and so on. Further consolidation in the financial center of New York and downgrading participation in UK and EU markets is where we’re headed.”

As business moves out of London, clearing has become a big area of concern for market participants. EU authorities want to promote Euro-dominated clearing within the remaining EU members, claiming it’s a matter of financial stability.

Neither the sheer scale of clearing business performed in London nor the experience of regulating clearing houses on this level exists in Europe, and many estimate it could take five to ten years to replicate such a structure. Though the EU understands this dilemma, it’s not their top priority. So, with time remaining between now and the UK’s departure on 29 March 2019, the question remains the same: how can a deal be reached that works for both sides and markets?

For more on Brexit, please check out these Brexit resources from our European affiliate, AFME, as well as the 2018 Annual Meeting Debrief from SIFMA Insights.

Peter Matheson is Managing Director for International Policy and Advocacy at SIFMA.

Read More

• SIFMA Insights: 2018 Annual Meeting Debrief