London’s investment bankers still hope for a “back door” to the Single Market

EPA

A combo of file photos showing branches and office buildings of JPMorgan Chase, UBS, Royal Bank of Scotland, Barclays and Citigroup.

London’s investment bankers still hope for a “back door” to the Single Market


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One in four investment banks operating from the City of London has applied for an EU license, Reuters reports.

Only 10 of the 40 global multinational investment banks have applied for an EU license, although most have made clear they would be moving to open subsidiaries in the Single Market, that is, mostly in Frankfurt, Dublin, and Paris. However, the German banking regulator (Bafin) and the Irish Central Bank have not reported applications for the first half of 2017.

The delay is causing financial and regulatory concerns. The Bank of England estimates that 50% of debt and equity in the EU are managed through the City of London.

Setting up an EU subsidiary could take up to 18 months. Although licensing itself may only take six-to-12- months, relocation also involves issues such as finding office space, relocating staff, recruitment, revision of existing contracts, and technological issues.

According to European Central Bank (ECB) sources, banks need to speed up the process to avoid so-called “cliff-edge,” or a serious disruption of financial services. However, the issue at hand is not technical.

The ECB cannot oversee the EU 27 brokerage market since it has a mandate over the Eurozone alone.  The market are still dominated by national regulators, which provides scope for “divide and rule.” Some investment banks may seek to avoid ECB supervision by setting up so called “back-to-back” brokerage deals. That wouldn’t allow them to direct loans, but they could issue securities.

Earlier this year, Bloomberg reported that the Spanish regulator (CNMV) is open to 100% back-to-back trading, whilst Germany’s Bafin is said to only consider this as an interim measure. “Back-to-back” trading is about allowing securities to be physically traded in Europe while doing all the value-added work such as risk management and the transactions from London. That would allow the lucrative Euro-clearing business to remain in London, in substance if not in principle.

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