Aite Group examines what might be in store for London as a forex and derivatives trading hub outside of the EU.

Aite Group, the consultancy, has commented on how the UK vote to withdraw from the European Union will affect London’s status as a foreign exchange centre. At a time when financial capitals are jockeying for a slice of the business, with countries hoping to win trading in China’s renminbi currency for example, this issue has global importance, of interest not just to Frankfurt, Paris and Milan but to Singapore, Hong Kong and New York. Here is what some of Aite Group’s analysts have to say.

"The UK’s decision to leave the EU over the medium term will have serious repercussions for London’s status as the hub for FX trading. EU and eurozone disintegration risks are now not farfetched. Should the EU/eurozone continue their existence three years from now – which is still the more likely scenario – it is hard to imagine how EU authorities would not force a claw back of FX activity for euro trading out of the UK and back to continental Europe," said Spencer Mindlin, analyst at Aite Group. 

"There are no early indications of brokerage firms failing, as most of these had prepared by raising client margin requirements ahead of the referendum. Retail investors, particularly those in Britain, appear to be sanguine, snapping up selectively cheap blue chip stocks while dumping smaller equities. But the hit on global equities is bound to make wealthier investors switch to risk averse and capital preservation mode, which ironically calls for them to tolerate negative interest rates on their investments.  

"Post-Brexit, an LSE-Deutsche Boerse merger represents the best hope for continued progress toward a pan-European trading environment. With the UK outside, however, the practical and political issues around valuation, location, governance, and supervision just got much more complicated. Should the exchanges merge and land in the UK, the parent entity would be outside EU jurisdiction," he added.

Regulation
"The UK will not avoid the European Commission’s Markets in Financial Instruments Directive reforms, and MiFID II is likely be implemented and adopted in the UK well before Brexit goes into effect," said Virginie O'Shea, research director at Aite Group.

"The biggest impact of Brexit on the post-trade landscape is the uncertainty that surrounds the implementation of MiFIR and Central Securities Depositories Regulation, and ongoing support for European Market Infrastructure Regulation. If the UK opts to take a significantly different tack and does not seek equivalence under third country equivalence rules, then it will complicate compliance for all firms active in European markets," she added.

"Financial penalties for settlement fails under CSDR, for example, should remain consistent between the UK and European CSDs, even though the UK is no longer technically subject to direct regulatory oversight by the EC or European Securities and Markets Authority. If it does not, then firms in Europe or the UK will be disadvantaged by higher penalties.

"As the UK is the main derivatives market in Europe, it is likely that firms will begin lobbying for a reversal of some of the main provisions of EMIR. The outcome if the Financial Conduct Authority takes this tack, however, could be far from positive. Cross-border activities could become much more costly and complex. The planned introduction of interoperability across European CCPs as part of MiFIR would also be prevented if there is divergence," said O'Shea.