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Brexit 101

  #551 (permalink)
 
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Clearing of derivatives .... EU wants more control and could ask a relocation of those firms from UK to EU after the exit

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  #552 (permalink)
 
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The EU is seeking new powers to allow it to deny post-Brexit London the right to host some financial market clearing operations that deal in euros.

:: What is clearing?

Clearing is the process in which a promise of payment is turned into an actual payment by moving money from one account to another.

For example, where someone buys a share, clearing involves delivering that share from the seller to the buyer and the money for it from the buyer to the seller.

:: Why is it in the news?

Because the European Commission wants to force parts of some euro-denominated clearing currently done in London to be carried out in the eurozone.

:: What in particular?

Euro-denominated derivatives such as swaps - instruments that are used by businesses to protect them against moves in interest rates or currencies that might hurt them.


:: Is this business important to the UK?

London is where nearly three-quarters of euro-denominated derivatives transactions are cleared. It is undoubtedly profitable for the UK although it is hard to put a figure on it and it is a low margin activity.

Just 1,000 people or so work at the London Clearing House. But a report by EY, the professional services firm, concluded last year that the loss of all euro-denominated clearing could result in the loss of 83,000 City jobs, once lawyers, accountants and IT professionals elsewhere are included.

:: Why is so much of this business done in the City?

Lots of reasons. But it's mainly because so many global financial services companies have operations in London and they like using UK law.

:: What's the argument for removing this business from London?

The French have been pushing for this for years and Brexit has given them another excuse. They argue euro-clearing operations should be where euro-system supervision is carried out.

:: Why do they say that?

The London Clearing House, where this business is done, sits - like other clearing houses - between the two counterparties in a trade and has to manage the risk if either side defaults.

Because it is where three-quarters of euro-derivatives trades are cleared, the Commission argues it is 'systemically important', so should be regulated in the eurozone.

:: Is that justified?

Not really. Yen trades, for example, are routinely cleared in London. The Japanese have never insisted they are cleared in Tokyo.

Similarly, Eurex, which is owned by Deutsche Boerse, clears - among other things - transactions involving UK government bonds and shares listed on the Irish Stock Exchange. Britain and Ireland have never insisted such transactions are cleared here or in Dublin.

:: So what's it all about?

A power grab, particularly by the French, who have long envied the City's position as Europe's pre-eminent financial services sector. Brexit is the excuse.




Rest of the FAQ on Sky News

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Some of the biggest US financial groups including Morgan Stanley, Bank of America and Citigroup, are examining whether to move transactions totalling hundreds of billions of dollars out of London to rival hubs because of Brexit, calling into question the City’s role as one of the world’s leading centres for investment banking.

The largest investment banks book much of the business they do around the world in London, not only from European clients, but also from those in Asia, Africa, the Americas and the Middle East.

Twice as many US dollars are traded in London as in New York and the UK accounts for almost 40 per cent of the world’s $3tn-a-day interest rate derivatives market, although it was recently overtaken by the US.

While bank bosses have made many headline-grabbing statements about moving thousands of jobs out of the UK because of Brexit, the possibility that they will drain some of their big pools of money out of London has drawn less attention.

But reducing the funds they hold in the UK could have consequences for almost every aspect of their presence in the country — including staffing.

“From a supervisory perspective what matters is aligning the risk taking, the management and the money (both in the form of capital and revenues),” says Stephen Adams, senior director at the consultancy Global Counsel.



Senior executives at some banks said they were considering how to handle their “rest of world” business if they had to shift capital and liquidity from the UK to the EU.

They fear that if a “hard Brexit” severs financial services access between the two markets, London would become less effective as a global booking centre. As a result they are in early-stage discussions on whether to shift some of the business to New York, Hong Kong, Singapore or Frankfurt.

Michael Cole-Fontayn, head of Europe at Bank of New York Mellon and chairman of the Association for Financial Markets in Europe, warns of the “pretty enormous” costs if Brexit forced banks to split the capital currently concentrated in London.

“That’s absolutely a potential outcome and what we’ve said all along is that it is important that this capital and liquidity currently based here to fund jobs and activity is not moved to New York,” Mr Cole-Fontayn says. He adds that UK-based banks had €57bn of capital supporting more than €1tn of securities and derivatives trades with EU clients and another €13bn of capital to support €180bn of loans to EU clients.

Most banks have only recently started to think about how they may change their global booking structures after Brexit. Any big moves are unlikely to be decided until the UK’s new trading agreement with the EU is finalised, according to senior bankers.

Full article on FT

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Japan’s biggest securities firms have zeroed in on Frankfurt as their base in a post-Brexit European Union.

Nomura Holdings Inc. picked the German city as the headquarters for its EU operations after the U.K. leaves the bloc, according to people with knowledge of the matter. Smaller rival Daiwa Securities Group Inc. said it will establish a subsidiary there to continue to service clients in the EU after Brexit.

Nomura plans to transfer fewer than 100 people to Frankfurt from London after seeking regulatory approval and office space, one of the people said, asking not to be identified because the matter is confidential. The company, which employs more than 3,000 people in Europe -- mainly in the British capital, starts preparations this month, the person said. Daiwa will apply for a license to the German regulator, the Tokyo-based company said in a statement on Thursday.

Frankfurt, home to the European Central Bank, has emerged as one of the favored options for global banks seeking to relocate jobs from London. Goldman Sachs Group Inc. and Morgan Stanley are scouting for office space in the city, which could serve as their new trading hub inside the EU, people with knowledge of the matter said earlier this month.



Full article on Bloomberg

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Theresa May risks crippling the economy unless the City of London is prioritised immediately in Brexit talks, senior City sources warned on Friday.

There are concerns that a weakened Prime Minister will shy away from putting financial services, the backbone of the economy, at the forefront of the agenda as the UK starts its negotiations with Brussels.

Instead, they believe the Government is prioritising sectors such as car-making or fisheries, which the public regard as more important than banking or financial services but that employ fewer people and generate less tax.

An urgent rethink is needed, senior City figures told The Daily Telegraph, with Britain fast running out of time.

The longer it takes for the Government to strike a deal ensuring the City continued access to clients and markets in the European Union, the more likely it is that banks, insurers and asset management firms will have to move significant numbers of jobs to the continent, the sources warned. Many of these roles pay high salaries and their departure will inevitably result in reduced tax for the Treasury to spend.

William Wright, the managing director of New Financial, a think tank, said: “The focus since the election has been on a free-trade agreement for goods with UK politicians talking about German cars, Italian prosecco and French cheese. But the most complicated area of any future agreement with the EU will be services, especially financial services.

“Banks, asset managers and insurers will have to assume the worst-case scenario unless they get the answers they need in the next few months.”




Full article on The Telegraph

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This was a FIO webinar from March, which included an analysis of the Brexit risks and its impact on Sterling.

Things have moved on since March of course but it may still have some value.


I am unable to embed the video from the time the guy starts talking about Brexit, so a simple URL will have to do.




Brexit segment approx. duration: 11 min.

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European Commission chief Brexit negotiator has rubbished the idea that Britain could have "frictionless trade" with the bloc after Brexit.

Michel Barnier also doubted whether Britain "fully understood" the consequences of its vote to leave the European Union in March 2019.

In a tough speech to business and union leaders in Brussels Barnier said frictionless trade was "not possible" with a country outside the EU's single market and customs union.

Leaving these two agreements are a central part of the Brexit negotiations laid out by Prime Minister Thersea May.

Brexit Secretary David Davis has said a new trade deal should deliver the "exact same benefits" as single market membership.

But Barnier said only a combination of a customs union, which cuts tariffs and a single market, which guarantees free movement, "allows this free, 'frictionless' trade between our states. One does not go without the other."

He also poured cold water over moves by the City and the car industry to cut special deals to remain in the free market.

The negotiator said: "There can be no sector-by-sector participation in the single market: you cannot leave the single market and then opt-in to those sectors you like most – say, the automobile industry or financial services.

"You cannot be half-in and half-out of the single market."


Full article on IBT

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UK shoppers are "completely in the dark" about the effect Brexit will have on their weekly shop, a former Sainsbury's boss has told BBC Panorama.

Justin King, who ran the supermarket for a decade, said the "last thing" any current supermarket boss would reveal was their intention to put up prices.

But he added it was "very clear" shoppers would face "higher prices, less choice and poorer quality".

The main supermarkets declined to speak to BBC Panorama.

Mr King, who ran Sainsbury's until 2014, said: "Brexit, almost in whatever version it is, will introduce barriers.

"That makes it less efficient which means all three of those benefits - prices, quality and choice - go backwards."

Food and farming combined are the UK's biggest manufacturing sector and the EU is involved all along the chain - from what grows in British fields to the labels in shops.

The EU also guarantees free trade across the continent and Mr King - who supported Remain - said this frictionless movement kept food prices down.

Mr King, who has said the weaker pound will push up prices, added that EU membership helped retailers find the best suppliers and markets throughout Europe.

He also said the EU had driven up standards and enabled the UK to get out-of-season vegetables all year round.

EU tariffs

But manufacturing boss and Leave campaigner John Mills believes the EU keeps prices artificially high for the shopper.

He said: "Food prices inside the EU vary from food product to food product, but the average is something like 20% higher than they are in the rest of the world - so there is very substantial scope for food prices coming down if we switch sources of supply outside the EU."

Mr Mills, chairman of consumer goods firm JML, said cheaper prices may not mean lower standards.

He said: "The reason why food prices are higher inside the EU is because they have got tariffs which keep the prices up.

"It's not anything to do with quality - it's due to the institutional arrangements which means the food prices are kept much higher to increase farmers' incomes."


Full article on BBC News

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An American bank with 16,000 UK staff has warned that up to three-quarters of its workforce could be transferred to EU countries after Brexit, in a fresh blow for the City.

JP Morgan could see thousands of its bankers moved across the Channel once Britain cuts ties with Brussels, the lender's chief executive said.

Jamie Dimon said current plans allowed for "several hundred" of the bank's UK jobs to move to the EU after Britain's divorce from the bloc.

But he warned that that number could balloon.

"If the EU determines over time that they want to start to move a lot more jobs out of London and into the EU, they can simply dictate that," he said during a panel discussion at the Paris Europlace International Financial Forum on Tuesday.

The banking boss explained the majority of the bank's UK operations are actually aimed at serving clients across the EU27, putting the majority of those positions at risk of being moved out of the country.

"We have 16,000 people in the UK but ... 75 per cent of that is servicing EU companies, and if regulators say one day, you know, 'we're not comfortable with your risk people, your lawyers, your compliance being in the UK' they can make us move it.

"So we will simply be subject to what they do down the road."

JP Morgan revealed earlier this year it would be anchoring its EU operations in three cities, including Dublin, Frankfurt and Luxembourg.

It is understood the majority of those jobs will settle in three cities, but others will be spread across additional JP Morgan sites across the EU where it has offices in cities including Paris, Milan, Madrid and Stockholm.

The relocation drive is expected to take place ahead of spring 2019 when the two-year window for Brexit negotiations draws to a close, and the UK is expected to lose passporting rights for financial services.

However, Mr Dimon's comments raise the prospect of a further exodus of banking jobs to Europe after those exit talks draw to a close.

"What happens next is totally up to the EU, it's not up to Britain," Mr Dimon said.



From The Independent

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Last Updated on September 27, 2021


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