March 8, 2019
By Huw Jones
LONDON (Reuters) – A quiet, permanent shift in trading from London to the European Union ahead of Brexit is picking up speed as stock and bond platforms in Amsterdam and Paris crank into action.
Few expect London to lose its position as Europe’s biggest financial hub, but Britain’s departure from the EU is turning into a multibillion-euro boost for the bloc’s protracted efforts to build a deeper capital market to rival the UK capital.
Britain’s parliament is due to vote on Tuesday on a divorce settlement with the EU that includes a “business-as-usual” transition period from March 29 to the end of 2020.
Three weeks away from Brexit Day, it is unclear whether a deal will pass, whether Brexit will be delayed, or whether Britain will leave with no agreement at all.
But whatever happens, a fundamental change in European markets is underway.
“The ship has sailed and market infrastructure has changed with people having made their decision, taken premises, hired staff and doing all the testing,” said Steve Grob, head of marketing at trading technology firm ION Markets.
Dutch regulatory approval is imminent for trading in euro government bond and repurchase agreements at U.S. exchange CME’s new Amsterdam hub to begin on March 18, the company said.
U.S. exchange Cboe also expects the regulatory green light imminently to shift euro denominated share trading from London to its new unit in the Dutch capital for April 1.
Trading platforms, essentially a heavily-regulated grouping of computer servers, are not major employers and therefore the number of jobs leaving London will not be large.
But a shift in trading could act as a magnet that drags other business like clearing and listings across the English Channel, Grob said.
Chunks of trading assets have already gone ahead.
The Association for Financial Markets in Europe (AFME) estimated in a 2017 report that lenders held 1.1 trillion euros ($1.2 trillion) of derivatives, stocks and bonds on their trading books in London on behalf of customers in the 27 states that will remain in the EU.
Consultancy EY said that 800 billion euros of assets had shifted from London to new banking hubs in the EU.
For the bulk of the money, the shift is expected to be permanent because the European Central Bank, the main supervisor of EU hubs, has made locating significant amounts of euro business in the bloc a condition in new licenses, bankers said.
Exchange officials also don’t want to split trading in euro securities between the EU and London, which would create two, less efficient pools of liquidity.
“At the moment it’s incremental steps but with every week and month, it will add up to a lot and it’s one way,” said Rob Boardman, head of European equities at broker ITG.
“I’ve not heard of EU trading platforms suddenly deciding they want to open a hub in the UK.”
Brexit and competition to attract trading activity from London is pitting Amsterdam against Paris for the mantle of EU capital markets leader from a departing Britain.
Amsterdam, home to the world’s first stock exchange and a trading nation for as long as Britain, is culturally aligned with the City of London financial district, Grob said.
Euro repo trading alone at the CME’s new unit in Amsterdam will total about 200 billion euros a day.
“It made natural sense for us to go there,” CME Chairman and Chief Executive Terry Duffy said.
Egged on by customers, LCH, a unit of the London Stock Exchange (LSE), has already moved clearing in euro repo trades totaling nearly 780 billion euros a day from London to its established Paris arm in a sign of how clearing is shifting too.
Cboe Europe, which accounts for over a fifth of daily pan-European share trading or 8 billion euros, will trade all European Economic Area listed stocks in Amsterdam from April 1.
Smaller rival Aquis Exchange, representing about 4 percent of pan-European stocks trading, intends to trade all its euro business in a new unit in Paris.
Interdealer broker TP ICAP is also opening an EU hub in Paris, and its iSwap fixed income business is setting up in Amsterdam. MarketAxess has a new hub in Amsterdam too, to trade credit in parallel with its London unit.
The LSE’s Turquoise pan-European share trading platform, which has about 7 percent of the market, is opening an Amsterdam hub but will continue trading euro stocks in London if there is a Brexit deal, though much could hinge on where customers want to trade.
Britain’s future trading relations with the EU will determine how much euro-denominated trading and clearing will eventually move to the EU, Grob said.
‘CITY SUR SEINE’
French banks have mooted a “City sur Seine” to reduce the EU’s reliance on London and on banks for funding the economy, an ambition that one market veteran called “aspirational” given investors’ suspicion of France’s tradition of interventionism.
But Arnaud de Bresson, head of Paris Europlace, which promotes the French capital as a financial center, said that while Paris would contribute “energetically” to EU financial reform, it was also attuned to the needs of markets.
“Paris is already, after London, the top financial center in Europe for capital market activity. We are very close to the capital market culture,” de Bresson said.
Banks also want Brussels to beef up efforts to build a deeper EU capital market as they face pressure from regulators to build up activity in their new hubs in the bloc.
“In light of Brexit, the CMU (capital markets union) project is more vital than ever for the EU to enhance and integrate its capital markets capacity and infrastructure,” said Rick Watson, head of capital markets at AFME.
(Reporting by Huw Jones; Editing by Mark Potter)