How ongoing Brexit trade deal talks impact U.K. stocks and sterling
Europe will see the largest stock trade reschedule in more than two decades as exchanges reopen in 2021 and Brexit’s center of gravity shifts from London.
While market participants hope that the years of preparation after the UK voted to leave the European Union means that the transfer of most euro-denominated assets such as equities and financial derivatives out of the country will be relatively smooth, the long-term implications of this process are unclear. and cause concern.
«This is a big bang event and this is one of the things the market hasn’t figured out yet.», – said to Reuters Alasdeir hanes (Alasdair Haynes), CEO of London-based trading platform Aquis Exchange.
«This will literally happen on a certain day, and we must pray to God that some extraordinary events related to the creation of large volumes will not happen on the market.», – said Haynes.
While the landmark trade deal agreed last week sets rules for industries like fisheries and agriculture, it does not extend to the much larger UK financial sector, which means automatic access to EU financial markets will end on 31 December..
The next few days of the new year will allow for the first time to feel the impact of the shift, and regulators on both sides of the Channel will be on heightened alert in the event of market disruptions on January 4, the first trading day of the new year..
EU wants to reduce dependence on the City of London for financial services and see more euro-based trade in Frankfurt, Paris, Amsterdam and other financial centers in the block.
This will split the European equity, bond and derivatives markets into two separate trading pools, raising fears that investors will receive less competitive prices..
EU banks must trade euro-denominated shares within the block from 4 January, forcing them to switch from platforms operated by companies such as Cboe Europe, Aquis Exchange, Turquoise of the London Stock Exchange (LSE) and Goldman Sachs in London to EU financial hubs that were opened in Amsterdam or Paris.
Most stocks are still traded on their home exchanges, but London platforms account for almost all cross-border stock trading in the remaining 27 EU countries.
According to Cboe, in October it to 8.6 billion euros ($ 10.4 billion) a day, or a quarter of all European trade..
David Howson (David Howson), President of Cboe Europe, said almost all cross-border European stock trading will be transferred overnight.
The last time such a rapid change in volume occurred in 1998, when dealers in striped jackets on the LIFFE exchange in London, trading 10-year German bond futures, were tempted by cheaper electronic screens in Frankfurt..
«This is the largest shift in individual stock trading in at least two decades.», – Howson said.
As for the Aquis Exchange, more than half of the company’s future business will be in the EU rather than London, while Cboe hopes that over time, clearing for equity deals could shift from competitors in London to its own clearing house in Amsterdam..
Goldman Sachs expects half of the daily stock trading on its Sigma-X Europe platform to move from London over time to its new hub in Paris.
On December 5, Cboe conducted a training simulation, which Howson says showed that its clients were expecting to move all of their trading in European equities to the EU..
Another major source of income in London is trillions of euros in derivatives. This anomaly, which emerged in 1999 when the UK abandoned the euro, has resulted in the overwhelming share of euro-denominated swap trading in the capital of the largest island in Europe..
The Bank of England has warned that trading in interest rate swaps worth about $ 200 billion could be disrupted because banks operating in the UK and EU must trade within their jurisdiction or on approved platforms in New York.
This could force the UK to loosen its restrictions on swap trading at the last minute to minimize disruption.
Eric-Jan van Dijk (Erik-Jan van Dijk), head of treasury and derivatives at Achmea Investment Management, said regulators have already taken steps to mitigate some of the risks by allowing EU banks to temporarily continue clearing their derivatives in London.
But trade will have to get off the ground and some counterparties with existing UK swap contracts were reluctant to change them until absolutely necessary..
«We may leave some of our existing UK positions and we may decide not to do business with these UK counterparties in the future.», – said van Dijk.
Governor of the Bank of England Andrew Bailey (Andrew Bailey) announced that he would have all of his «arsenal», although so far regulators say they do not expect any threats to financial stability.
«It cannot be completely ruled out that some special disruption could occur given the scale of the change, but overall we are satisfied with good proactive risk management throughout the system.», – said Nikhil Rati (Nikhil Rathi) Chief Executive Officer, Financial Conduct Authority (FCA).
The first day of trading in January may even be quiet and calm as volumes may be underreported as some market participants may prefer to watch from the sidelines to see how things go, Cboe and Aquis said..
In the long term, the focus will be on how much trade is increasing within the EU and how much it will fall in the UK..
«It’s not the beginning of the end of London, but it’s a heck of an awkward position and an own goal for Britain.», – said Haynes of the Aquis Exchange.