Back-to-back trades — a long standing technique that has helped London to prosper as a global trading hub — have been a thorny issue in predicting Europe’s financial landscape post-Brexit. They would allow financial products to be sold in the EU before the risk is transferred to the UK through an internal trade.
Eurozone regulators initially encouraged banks to structure their operations so that their trading with EU clients would be carried out and risk managed in the EU. That would have required the banks to move larger numbers of staff out of London, and could also have increased their overall capital requirements since they would not be able to efficiently offset risks between their EU and UK businesses.
Three senior executives at large global banks said that the ECB’s regulatory arm was becoming more disposed to back-to-back models as banks explained how they already use them for many jurisdictions.
“The back-to-back model is the lifeblood of global capital markets,” said one of the executives, who works for a large US bank. “As every day goes by they [regulators] are getting their heads around the fact that this is what needs to happen.”
The second senior executive, who works for another Wall Street giant, said the ECB’s most recent informal guidance was that they wanted the EU subsidiaries to have capacity to do some trading in market if needed.
“They’re not telling us we have to have it all [in market],” he said, adding that one official had suggested 20 per cent as the potential percentage of risk. Other banks said they had not been told this figure, while the ECB declined to comment on talks. A person familiar with the ECB’s position said there had been no softening of their stance.
A senior executive at a third non-EU bank said its base case was that back-to-back arrangements would be allowed, if only because any other outcome appeared inconceivable. Jim Cowles, Citigroup’s chief executive for Europe, the Middle East and Africa, said there was a “process that we have to go through with regulators” on the consequences of not allowing back-to-back.
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