In bitterly contested divorces, playing hardball over the little things can be a way to show strength. As Britain finally left the European Union on Dec. 31, Brussels declined to grant the United Kingdom approval as an “equivalent” country when trading shares and interest rate swaps. As a result, some dealing in these instruments shifted out of London in January. It’s a skirmish ahead of bigger battles to come.
Stock exchanges in Amsterdam traded shares worth 9.2 billion euros a day in January, beating the 8.6 billion euros traded in London, according to the Cboe exchange. Meanwhile, London’s share of trading in euro-denominated interest rate swaps dropped below 10% in January, from almost 40% in July, IHS Markit reckons. Activity not only shifted to the EU but also to U.S. trading venues, which EU regulators deem equivalent.
Though the numbers are striking, they represent a tiny proportion of the trading in currencies, bonds and other instruments that flows through the City of London. Moreover, while transactions may no longer be executed in London, the people – or algorithms – issuing the instructions have mostly stayed put.
Even so, the standoff is evidence of the EU’s broader desire to lure financial activity away from London following Brexit. Economic self-interest plays a part. But EU policymakers are also unhappy about the bloc’s capital flowing through a large financial centre no longer subject to European regulations.
This suggests further battles to come. One flashpoint is the clearing houses which process derivatives trades. The EU has granted temporary equivalence to so-called central counterparties in the United Kingdom, but expects EU investors and companies to reduce their exposure to them over time. Meanwhile, some European regulators remain keen on tightening up delegation rules, which enable pension funds to outsource investment decisions to fund managers in financial centres like London.
The EU’s adversarial approach has irked Bank of England Governor Andrew Bailey, who on Wednesday pointed out that the bloc was holding the UK to higher standards over equivalence than other countries it deems acceptable. The EU says it’s waiting to see the direction of post-Brexit financial regulation. The UK insists it has nothing to gain by undercutting European rules, but so far has little to show for its principled stance. This divorce battle is only just starting.