01 August 2017

Financial Times: London trading centres put Brexit plans into action

[...] KPMG, the professional services group, says September is the last chance for companies to begin setting up an EU subsidiary. They are now scrambling to find complimentary continental operations or reinforce existing operations in the EU countries.

The pressure on London-based trading venues intensified last month after the European Securities and Markets Authority sought to prevent UK-based institutions from running so-called letter box operations in which companies simply run shell operations in the rest of the EU and then direct business back to London.

Steven Maijoor, chairman of Esma, argues that the guidelines, which were aimed at EU countries vying to capture business from London, did not set new European standards for the UK’s departure “but rather apply existing legislative and supervisory practices”.

For the trading venues putting contingency plans into action, hiring new staff for European subsidiaries is the priority. Their names are submitted as part of the EU regulatory applications, which could take about nine months to process. Customer contracts will need to be updated to reflect any business that is booked via a new legal entity.

As the preparations for Brexit intensify, setting up EU operations may mark the start of a more formal divergence between the UK and European markets. From January, new European rules set tougher standards for its investment firms accessing overseas markets, such as the US, Singapore or Japan. When Britain leaves, Brussels will have to judge that British market regulations are also “equivalent” to EU standards.

This leaves the trading venues in a Catch-22 situation. A decision on equivalence can be made only after the UK has left the EU, but absent a formal legal transition agreement, trading venues must be fully compliant from the day the Britain leaves. Lawyers argue that much will depend on Esma’s ability to apply its own guidelines across the EU27. If they become too onerous, venues may stick with the UK. 

“It would cost Europe a lot to force these issues,” says Alasdair Haynes, chief executive of Aquis Exchange, a UK share trading venue.

“Look at France wooing everyone to Paris, and yet they are pushing these issues with Esma. Do the German companies whose cost of capital will rise really want this? Perhaps some of them would move to London if the cost of raising money becomes too high,” he says.

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