Has Brexit boosted London’s financial center?

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There were many dire warnings about the impact Brexit would have on the UK economy, including that it would devastate the UK’s most successful export industry: financial services. The former director of the London Stock Exchange suggested that more than 230,000 jobs in this industry could disappear.

The warnings seemed logical.

By leaving the European Union, UK-based banks and other financial firms lost their unfettered access to the EU market, which in 2019 accounted for about 40% of sales abroad UK financial products and services.

Brexit has also meant that trading of most euro-denominated stocks has been restricted to EU stock exchanges and as a result London has – for much of the past year – lost the position of Europe’s leading hub. stock trading for the benefit of Amsterdam.

But the prophecies of doom for the City – as the financial hub of London is known – may have been overstated. Official figures for the first quarter of 2021, the first three months after Brexit took effect, show a small increase of UK financial exports to the EU, despite the barriers erected by Brussels.

“It totally contradicts the predictions of people who were in favor of staying in the EU,” said John Longworth, a businessman and former member of the European Parliament for the Brexit Party. “What this demonstrates is that leaving the single market was far from a disaster. London will continue to thrive and grow stronger. »

This confidence seems to be widely shared in the financial district. The bosses of more than two-thirds of City businesses have expressed their belief in a recent survey that London will retain its dominant role despite Brexit. This is also the view of Barnabas Reynoldspartner at the international law firm Shearman & Sterling.

“The City continues to be a leading global financial center, with the most competitive prices and offerings of financial products and services in the world. Liquidity and prices here are second to none,” Reynolds said, adding that he was “not at all surprised” to see official figures showing an increase in the city’s exports to the EU.

But other observers take these figures with a grain of salt. It’s too early for Brexiteers to declare victory based on one-quarter statistics, said economist and head of CSFI think tank Andrew Hilton – especially during a pandemic.

“It’s very difficult at the moment to sort out the impact of Brexit itself from the impact of COVID,” he said.

Brussels is also mounting its most serious assault yet on the City’s role as Europe’s financial hub. Eurocrats now have their eyes on the Square Mile derivatives clearing market, a massive $770 trillion enterprise.

“London doesn’t just dominate this market in Europe,” said Jack Neill-Hall of lobby group TheCityUK. “London is the world’s main clearing hub. For example, more dollars are cleared in London than in New York.

It is a lucrative activity, and Brussels would like to have a share of it, but it is also a systemically critical activity. Derivatives clearinghouses act as intermediaries between buyers and sellers of things like swaps, options, and futures. Moreover, they ensure that transactions are settled even if one of the parties goes bankrupt.

“The larger your clearing industry, the lower the costs and the better the risk is spread throughout the system. It’s like insurance. The more people involved, the safer it is,” Neill-Hall said.

This explains why much of this activity has been concentrated in one place like London.

Brussels, however, wants to separate all euro derivatives clearing – around a quarter of the London market – and localize it within the EU. It’s bad for the city, Neill-Hall said, but even worse for the block.

“For European companies, this means higher costs, less suitable and less flexible products and greater underlying risk for EU companies,” he said.

Nevertheless, Brussels continues to pressure banks to move their euro clearing to the mainland. So how secure is the City’s position as a global financial center?

Although skeptical about the reliability of these first quarter export statistics, economist Hilton remains reasonably optimistic about the future of London’s financial industry. He said that so far the city has held up well against the EU cutting corners on its affairs.

“Amsterdam has resumed equity business, France has resumed hedge fund business, Germany has resumed banking business, but there is no single financial center that threatens London yet,” Hilton said.

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