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How Brexit has already cost London’s financial hub billions

Sep 24 2019 09:19
Silla Brush and Viren Vaghela

Whether the UK leaves the European Union with no deal or clinches a last-minute agreement in the coming weeks, Brexit has already taken a toll on London’s finance industry.

Three years and three prime ministers since the vote, fraught negotiations and political turmoil have sapped confidence in the industry, putting financial firms on the verge of moving thousands of jobs - and possibly 1 trillion pounds ($1.24 trillion) of assets - out of London.

There are signs of resilience: London has extended its lead in foreign-exchange interest-rate derivatives trading since the referendum, and the city remains the only European financial hub in consultancy Z/Yen’s ranking of the world’s top 10. Still, Catherine McGuinness, chair of the policy and resources committee at the City of London Corporation, which oversees the financial district, said there was little doubt that the Brexit process was hurting financial services, which account for 11% of tax receipts in the UK.

“The UK does need to be very careful how it treats its services sector, because it could lose more than it needs to if it’s not,” McGuinness said in an interview. “Of course we will lose some EU-facing business.” She said she’s “very concerned about the shorter term, especially if we have a no-deal exit.”

Here’s a look at the biggest repercussions so far.

Jobs, Assets

The earliest fears about London hemorrhaging tens or hundreds of thousands of jobs haven’t become reality. Still, large global investment banks have relocated 1 000 jobs to the continent so far, and a total of 7 000 could easily move in the short term, according to consulting firm EY.

Banks have also earmarked up to 1 trillion pounds in assets to move to the EU, EY said on Sept. 19, but have been slow to actually shift them. The world’s biggest inter-dealer broker, TP ICAP, said last month that it may shift as many as 60 brokers out of London if the UK leaves without a deal.

Repo

The CME Group, the world’s largest exchange, shifted its $230 billion European repo business on its BrokerTec platform to Amsterdam, according to the company’s latest data. It received regulatory approval in March. The roughly $40 billion in UK repo remains in London.

Repo deals let big investors - like mutual funds - make money by briefly lending idle cash to banks and broker-dealers, who receive the financing by loaning out securities they hold in return.

LCH, the world’s biggest derivatives clearinghouse, shifted its euro repo clearing business to Paris earlier this year. The arm of London Stock Exchange Group has also been under pressure from Frankfurt-based Eurex Clearing, which wants a bigger share of the euro interest rate swap business. It has made some inroads in a growing market, but more than 90% of the market remains in London. That’s because big firms dealing in multiple currencies can save on the cost of margin they have to leave by using only a single clearinghouse.

Provisions

Most large UK banks have been making provisions to account for an economic downturn or loans turning sour in a hard Brexit.

Insurance Migration

As much as 61 billion pounds of insurance business is shifting. UK-based underwriters have been transferring policies held by European clients to units in Luxembourg, Ireland and elsewhere: Admiral Group, for example, chose Madrid, spending 4 million to 5 million pounds to make that move.

- With assistance from Will Hadfield, Stefania Spezzati and Jeremy Diamond.

london  |  brexit
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