So what now? The City's Brexit agenda

Jobs moving, a deal freeze, regulation of funds and clearing – these are now some of the big issues facing the City after the historic Brexit vote.

A sad businessman sat on the edge of a cliff with the City of London in the background

iStockPhoto/ FN Montage

Who’s affected?: All of finance, but banks have sounded the loudest alarms

City-based investment bankers and traders will be wondering whether their roles now stay in London or are moved to another of Europe’s financial hubs, such as Paris or Frankfurt. During the lead-up to the referendum, a handful of bank bosses – including those from JP Morgan, Morgan Stanley, Citigroup and HSBC – have said that investment banking jobs could move from the UK in the event of Brexit.

The most high-profile warning in the referendum run-up came from JP Morgan’s chairman and chief executive Jamie Dimon. Visiting the Wall Street bank’s Bournemouth office in early June, Dimon said that if the UK voted to leave, “we may have no choice but to re-organise our business model here”.

Such job moves will likely come as firms based in the UK face the prospect of losing their ability to passport their services elsewhere in the EU. At Citigroup, UK country officer James Bardrick wrote in a June memo to staff: “To continue to serve our clients and maintain efficient access to those markets currently enabled through the EU passporting regime, we would likely need to rebalance our operations across the EU.”

Earlier in the year, HSBC chief executive Stuart Gulliver had said Brexit could see the UK bank shift some of its UK-based sales and trading jobs elsewhere. People familiar with the bank’s plans told FN at the time that Paris was among the locations being considered.

Who’s affected?: Investment bankers and private equity managers

Even before votes had been cast, the referendum had affected the number of deals taking place in the UK. Now, say bankers, things are likely to get worse. They warned FN in the run up to the vote that leaving would be catastrophic for deal activity.

Equity capital markets bankers in particular were keen to get the Remain message across. IPOs have proved a good bet for deal-starved investors this year, with an analysis of the 392 businesses to have floated in Europe last year and those that listed in the first half of 2016 showing that the proportion of companies trading up is actually higher in 2016 (81%), according to Dealogic.

“When you look at how the IPO market has performed, it is in better shape than the screens might have suggested,” said Richard Cormack, the head of equity capital markets at Goldman Sachs.

But this is all unlikely to persuade businesses on the edge of a float to push on now that Brexiteers have triumphed; if there’s one thing the IPO market doesn’t like, it’s uncertainty, and there will be plenty of that to go around in the weeks and months (if not years) ahead.

On the M&A side, the UK deal community will need to act quickly to make sure businesses don’t reconsider takeovers of British companies, although the decision to leave could trigger some activity by forcing UK companies to buy European firms. A survey of 1,500 M&A professionals taken by Intralinks in early June found that 67% of respondents globally felt a UK vote to leave would negatively hit M&A levels in Europe.

Who’s affected?: Fund managers and alternative investment firms

Assuming the Brexit will also mean an exit from the EU’s common market, UK funds managers are likely to find themselves designated as coming from a “third country” under the EU’s main funds regulations.

These are the Ucits regulations, which cover mutual funds; and the Alternative Investments Fund Managers Directive, which covers hedge funds, private equity and some other kinds of funds.

“Third country” means that UK-domiciled funds couldn’t be marketed in Europe. But a widely used workaround already exists under both directives; which is that UK-domiciled asset managers “provide services” to funds that are domiciled in places such as Ireland, Luxembourg or Malta. According to lawyers Dechert, “these arrangements can be expected to remain largely unchanged after any Brexit”.

Similarly, UK firms could also set up subsidiaries in EU countries to market funds there. Many have Luxembourg operations selling Ucits funds already – including Schroders and Henderson Global Investors; this is also how Swiss asset managers market in the EU.

But those who don’t have such operations already may face the task of setting them up, something that can be both “cumbersome and costly”, according to Régis Martin, the deputy chief executive of Unigestion, a Geneva-based fund manager that looks after $ 17 billion. But it’s clearly doable – Unigestion has such operations in both the UK and France.

Who’s affected?: Fund managers and alternative investment firms

Hedge funds and private equity firms are not big fans of the AIFMD. It places restrictions on remuneration, makes it a requirement to appoint a depository bank, and calls for additional regulatory capital, additional disclosures and reporting requirements. Some of these apply even if you’re a UK firm managing a fund based entirely outside the EU, say in the Cayman Islands.

Research firm Cerulli Associates has estimated that the one-off cost for a firm to become compliant with the directive ranges from $ 300,000 to $ 1 million.

Post-Brexit, the UK could choose to free domestic managers from much of this burden; of course, they would no longer be able to market to EU investors, but perhaps that isn’t a huge loss for firms without many European clients.

But asset managers, like most finance firms, will likely have to comply with much EU regulation for a while yet. Even in an optimistic scenario it is unlikely the country will be fully withdrawn from the EU by January 2018, which is the implementation date for the revised Markets in Financial Instruments Directive, or Mifid II, for example.

Even after full withdrawal, it’s likely the UK would wind up having to implement equivalent or at least similar rules; Switzerland does so in many areas right now.

There would be the possibility of changing or tweaking some aspects, such as exemptions from bonus caps, for example, but equally, nothing to prevent UK authorities from imposing tougher requirements than EU regulators. The UK’s Financial Conduct Authority has taken a much harder line than Europe in outlawing commission payments by fund managers to retail financial advisers, for example.

Who’s affected?: Mainly traders and market infrastructure firms

The Brexit vote will ratchet up the tension that already exists between the UK and Europe as to where euro-denominated trades should be cleared. Clearing houses are critical pieces of market infrastructure as they help to reduce risk by requiring members, typically large banks, to post collateral to guarantee trades in the event of counterparty default.

London is home to many of the world’s largest clearing operators, including the London Stock Exchange-controlled LCH.Clearnet and Intercontinental Exchange’s ICE Clear Europe, which both handle sizeable amounts of euro-denominated business.

The European Central Bank tried unsuccessfully in 2014 to force all euro-denominated clearing into the eurozone. It could now use Brexit – and the UK’s negotiations around it – as an attempt to do so again.

Even though LCH and ICE already have clearing house licences in eurozone countries – in France and the Netherlands, respectively – moving operations and associated collateral pools is far easier said than done, even if it is within the same entity. It would mean moving members away from what many view as the UK’s more preferable legal, insolvency and bankruptcy regimes – all of which play a significant role in the clearing process.

Who’s affected?: Buyside, sellside, tech providers, post-trade providers and more…

Say it quietly, but the Brexit vote makes no difference whatsoever to whether the UK has to adopt revised rules coming into force under the EU’s wide-ranging rulebook for trading in the region.

Mifid II applies regardless, because its start-date is January 2018, at which point the UK will still be a member of the EU and in the midst of exit negotiations. That means commodity position limits, dark pools caps, and measures to boost transparency in the bond markets will all come to these shores, in the short term anyway.

However, the extent to which UK regulators will maintain their commitment to Mifid II in the longer term depends on the specific terms of the UK’s exit agreement, which would determine its future relationship with the EU and the way UK financial firms can interact in the bloc.

If the UK, like Norway, decided to remain part of the European Economic Area, it will still subject to EU laws

However, if it decides not to be part of the EEA and brokers bilateral trade agreements with the EU it will, like Switzerland, have its own laws. In all likelihood, those rules would have to be almost identical, or ‘equivalent’, to those in the EU in order for firms to continue operating with businesses located in Europe.

The UK might have some wiggle room to implement its own financial regulation. In this scenario, Mifid II’s caps on dark pool trading might be first to go as they disproportionately affect the UK, where a greater proportion of trading typically takes place in the dark. The Swiss have managed to avoid them so far: its version of Mifid II, called FinFrag, does not include dark pool caps.

It is entirely possible of course that UK regulators could decide to a more stringent approach to financial regulation. Most notably, the FCA has long argued for a tougher approach than the EU on unbundling of asset managers’ payments for research and execution under Mifid II.

Who’s affected?: Dealmakers, traders and the exhanges themselves…

Xavier Rolet and Carsten Kengeter, the respective chief executives of the London Stock Exchange Group and Deutsche Börse, could be sweating this morning. Forget anti-trust reviews and potential revolts from German labour unions, the UK’s decision to leave the EU could prove to be the biggest obstacle to their planned £21 billion tie-up.

The deal was first announced in February, with further details trickling out since, but the companies have always stated plans for the combined group’s holding company to be located and regulated in the UK. However, many think German authorities would refuse to approve the deal if that holding company lies outside the EU.

It is for exactly this reason that the key shareholder votes had been planned for after the referendum vote. LSE investors are to vote on the deal on July 4, while the tender offer for Deutsche Börse’s shareholders will end on July 12.

For their part, both exchanges have consistently said the merger is not conditional on any outcome from the Brexit vote. Kengeter, who is set to be the CEO of the combined group, told the Daily Telegraph in June that the merger would be more important in the event of Brexit, as it would help maintain economic links between the two blocs.

However, one wrinkle is that any depreciation of the pound in the wake of Brexit could make the deal look worse for Deutsche Börse’s shareholders. If the terms of the deal were to change substantially, it could trigger one of the scenarios outlined by the UK’s Takeover Panel that would permit ICE – which ruled out a counterbid for the LSE on May 4 – to re-enter the bidding process.

Who’s affected?: London’s community of financial innovators…

London’s success as a fintech centre would take a hit, many investors and startups believe.

In an FN poll in early June, than two-thirds of the 118 fintech professionals surveyed by Financial News in early June said a British exit from the European Union could harm the sector.

One of the biggest concerns: access to talent. Many of London’s young fintech firms rely on know-how imported from tech-savvy countries such as Hungary or Estonia. With future entrants to Britain likely to find the road to the UK much harder, it could become much more expensive and complex for young companies to secure the talent they need to expand.

Startups might also face increased regulatory complexity, as until now they have been able to secure licenses from fintech friendly regulators in the UK and then “passport” them to other European nations.

However there is also a deeper concern. US startups have access to a giant home market which can help them quickly build scale and get to profitablity. Splitting the UK out of the European market complicates the growth of all new companies – no matter which side of the English channel they’re based.

Still, there was a minority who reckoned leaving the EU would be good for the sector, saying it could free up resources to reinvest in innovation and could also make it easier for UK companies to do business with non-EU countries.

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