27 February 2017

Financial Times: Equivalence makes sense for the City and Europe

Each side has a deep interest in access to the other’s markets after Brexit, in the FT's view; the logistics of establishing fully separate systems are nightmarish, and neither side, in the end, has full control of where financial activity happens.

[...]On the first point, not only do City funds and banks sell shares, debt, and derivatives across the EU, but Europe depends on the deep London market. UK banks hold £1.1tn in loans to European companies, the Bank of England says. Half of Italy’s sovereign debt is sold to UK-based companies, reckons the British Bankers’ Association.

Still, the European authorities might imagine that they can bring City business across the channel — if necessary, by requiring that EU institutions trade only with other institutions under EU jurisdiction, and clear euro-denominated trades only within the bloc. This would in theory force UK-based institutions to establish capitalised subsidiaries in the EU.

One wonders, however, how the UK could be singled out. Is the EU prepared to limit the range of European or euro-denominated products that can be traded in New York or Hong Kong? Markets operate 24 hours a day: they will not wait for morning in Frankfurt.

A discussion of what both sides want from equivalence is needed. Then, in the words of the EU chief negotiator Michel Barnier, “comparable and consistent” rules can be written, and it becomes “reasonable to . . . recognise the activities regulated under them as compliant”.

Such things have been done before, as when Europe and the US agreed on clearing houses in connection with the US Dodd-Frank reforms. Most importantly, such an agreement would need a mechanism to resolve the disputes that will arise.

The politics of Brexit may prevent a sensible deal. The UK should walk away if Europe demands that it becomes a regulatory vassal; the EU cannot allow the UK to de facto set its rules. Both sides should remember that markets find a way to subvert governments that fiddle the rules too much. And the markets are right to resist: it is not governments’ money.

Full article on Financial Times (subscription required)

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