(Bloomberg) – A month after Britain voted to leave the European Union, Boris Johnson was asked if he thought the financial industry would retain its rights to trade freely on the bloc. “I do, I do,” he told reporters. It was never that simple.
Half a decade later, billions of dollars in assets and thousands of jobs moved to the continent after the UK negotiated a basic trade deal with the EU that largely sidelined finance, giving cities across the bloc the opportunity to attract companies in the process of change. While the two parties may be on the verge of signing an agreement to cooperate on financial regulation, neither expects business to return to business as usual.
European cities like Amsterdam, Dublin, Frankfurt and Paris have captured some of the changes so far, although none have emerged as the clear winner yet. Some of these changes, such as stock trading volumes, occurred overnight. In other areas, like employment, it’s more of a slow drift as businesses and individuals try to figure out which city in the evolving post-Brexit landscape is best suited to them.
“We will have Frankfurt, Amsterdam, Paris and Dublin in the mix to take part of the financial system,” Mairead McGuinness, the bloc’s commissioner for financial services, told reporters in March. “The markets will decide that and are probably in the best position to do it.”
The situation remains fluid and the end result is uncertain. The UK and the EU are due to sign a memorandum of understanding at the end of March to cooperate on financial rules, which could pave the way for greater access for British companies through so-called equivalency resolutions in the future. Some flows could change direction as the UK begins to set its own rules outside the single market, while key areas for London’s decades-long dominance as a financial center, including clearing operations, have proven difficult until now.
“I don’t think you can create a financial center,” said Douglas Flint, chairman of British fund manager Standard Life Aberdeen. “The challenge for the EU is to determine where it chooses to locate such a center and how to get other competing EU countries to give up the activities they host.
But if the first three months of 2021 are any indication, Brexit could remake financial centers across Europe in the next few years.
This is what has happened so far:
European equity markets opened on January 4 to a unique change in generation, the “big bang.” Almost all the trading volume of shares of European companies that was managed in the UK was destined for the EU. London soon lost its crown to Amsterdam as the main place on the continent to buy and sell stocks. Trading in Swiss stocks, which had been blocked while Britain was a member of the EU, resumed in February, helping boost business on UK platforms. Britain now hopes to boost equity markets by making it easier for companies to go public in London.
London has long been a global center for interest rate swap trading, recently surpassing New York and cities in Europe and Asia. But the City was hit by its dominance after the EU prevented companies based within its borders from negotiating certain referral contracts on London-based platforms. Seeing a breakdown in the markets between the EU and the UK, some banks sent business to Wall Street, where both jurisdictions allow trading, although London remains a dominant player when off-site trading is included.
A key part of the financial market has yet to face many shocks: derivatives clearing. The London Stock Exchange Group Plc clearinghouse LCH won an EU decision allowing it to handle European business until June 2022. However, the EU is making it clear that it wants the balance of power to change, attracting more businesses denominated in euros. within its borders. The Bank of England has already promised that the UK will resist any move by the EU to force companies to relocate.
Initial public offerings are another area where Square Mile continues to outshine its continental rivals. UK trading is firmly on track for a record first quarter, with companies from boot maker Dr. Martens to Russian discount retailer Fix Price raising a total of $ 7.2 billion. That’s before the UK government’s proposed easing of listing requirements takes effect.
M&A bankers are also enjoying a remarkable year. Acquisitions of foreign companies in the UK have nearly tripled this year to $ 66 billion, a record for that period, according to data compiled by Bloomberg. Acquisitions of publicly traded British companies have increased more than sevenfold. However, this may reflect weakness rather than strength. British companies have become more vulnerable targets as the valuation gap between local stocks and other major markets widened over the past year.
Jobs and assets
Financial firms have announced that some 7,600 jobs will be transferred from the UK to the bloc, according to a study by consultancy EY. About 1.3 trillion pounds ($ 1.8 trillion) of assets are also on the move. Dublin has attracted the absolute largest number of companies of all kinds moving to the bloc. Frankfurt and Paris have also been popular with larger firms such as universal banks, investment banks, and brokerage houses.
While fiscal shifts and a comparatively sluggish British economy have had the biggest impact on property prices, Brexit uncertainty and the migration of Brexit bankers may be exacerbating existing trends in property prices. Since the UK voted to leave the EU, property prices in London have increased by 6%, compared to a fifth in Dublin and 40% in Amsterdam.
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