Brexit in the Time of Covid-19

By Mike Smith, Director Global Exchange Relations Management, IPC

To the casual observer, the impact of Brexit on the financial services community has not hit the headlines in the same way as, say, the impact on small businesses wishing to ship goods to clients in the EU, or the impact on fishermen who have found themselves unexpectedly unable to deliver their catch in a timely manner to European ports. It certainly pales in comparison to the recently experienced market volatility. Yet, albeit quietly, there have been a number of changes to the way in which market participants conduct their business.

Much in the same way as the Covid-19 pandemic has introduced far-reaching changes to the way we work and live, the impact of these Brexit-related changes will continue to be felt long past the immediate aftermath of the UK’s departure from the EU. It’s also by no means all settled and done; whilst the UK still hopes for a more collaborative and meaningful treatment of financial services, the EU is already making noises about reassessing the basis on which cross-border financial services activity is conducted into its Member States.

What have we seen so far? Banks and other financial institutions have had several years in which to put in place their Brexit plans and execute their strategies for continuing to do business with EU clients. Most of these have involved the establishment and authorization of branches or subsidiaries in one or more EU Member States. And it’s not only UK institutions who have had to implement Brexit plans – any firm previously reliant on its UK entity for access to EU clients has had to reassess its options. Establishing a new EU regulated outpost is no trivial matter either – the EU has been quite clear that “shopfront” establishments will not be tolerated, and that the new entities are expected not only to be fully capitalized, but also to have operational capability on the ground, and to undertake all regulated services with clients from the EU entity. This means that entire desks have had to shift away from London, to any one of a number of regional centers around Europe.

There has been no one single rival to the City of London emerging in the EU. Instead, we’ve seen different activities move to different Member States, in part due to the nature of existing infrastructure and in part due to the landscape encouraged by national regulators. Amsterdam, for example, continues to be a popular destination for trading venues and HFTs, with a number having relocated there. Paris and Frankfurt are by and large the traditional banking destinations. Ireland and Luxembourg, always popular destinations thanks to their excellent service infrastructure in terms of fund administrators and custodians, have seen further influx of funds and fund managers. And jurisdictions such as Lithuania and Malta have seized the opportunity to position themselves as new homes for payment service providers, e-money institutions, fintechs and other firms in need of regulatory authorization in an innovation-friendly environment, with a European entry point.

It was always anticipated by market participants that some liquidity would shift post-Brexit, and this has been borne out in practice. Lack of equivalence for the MiFID II Share Trading Obligation (STO) has led to EU stock trading moving, predictably, to EU trading venues. Risk.net estimates that up to 50% of Euro and Sterling interest rate swaps trading has moved away from both UK and European trading venues, and onto US Swap Execution Facilities (SEFs) since the start of the year in response to the absence of Derivative Trading Obligation (DTO) equivalence. CCPs, on the other hand, have largely remained where they are, thanks to various recognition agreements temporarily in place to minimize disruption.

From all of this, we can see that the impact of Brexit has been felt on more than just the movement and location of people. Firms have had to quickly assess and react to the movement of liquidity from one jurisdiction to others, and this has been a fairly smooth transition, due in large part to the experiences they’ve had earlier in 2020 dealing with the volumes and volatility associated with the early days of the pandemic. Brexit has also introduced more of a patchwork of market connectivity and market access, as multinational financial institutions figure out how best to maintain their access to liquidity and ability to service clients across a complex network of global entities. In these situations, it is absolutely critical for firms to have access to the trading venues and counterparties that they need to reach, when they need it.

IPC continues to support our global financial markets

Financial markets participants need the ability to rely on robust and resilient infrastructure providers. IPC has nearly five decades of history in this space, and we have enabled our clients to weather many a storm. Throughout this time, IPC remains focused on empowering all of our clients to maintain business continuity. We are dedicated to supporting our customers’ businesses and their ability to rely on robust and resilient infrastructure such as IPC’s Connexus Cloud platform, an ecosystem that interconnects more than 7,000 diverse capital market participants across 750 cities in over 60 countries, which can be vital for markets and customers, when liquidity is becoming fragile.

© 2021 IPC Systems, Inc. All Rights Reserved. The contents of this publication are intended for general information purposes only and should not be construed as legal or regulatory advice.