Who Wins From Brexit? New York

 Who Wins From Brexit? New York

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About $1.6 trillion in assets has left London since the 2016 Brexit vote, according to EY.

About $1.6 trillion in assets has left London since the 2016 Brexit vote, according to EY.

Photo: tolga akmen/Agence France-Presse/Getty Images

In the tug of war Brexit has unleashed between London and other European financial centers, one potential winner is often forgotten: the U.S.

More European capital-markets business is done in London than in any other city. Some of that activity will have to move after the end of this year, when transitional arrangements agreed at the time of Britain’s departure from the European Union expire.

This doesn’t depend on the trade deal currently under negotiation. Hopes of a positive outcome have buoyed sterling this week, and an agreement is crucial for goods industries with complex supply chains, such as autos and food. But a deal that preserves anything like the status quo in financial services isn’t on the table.

That means U.K.-based financial institutions will lose their “passports” to transact freely in the EU on Dec. 31, while EU companies won’t be able to deal as freely in London. The change will fragment liquidity and add cost and complexity for all manner of operations that in recent decades have settled in London.

Among the few beneficiaries will likely be U.S. derivatives exchanges that are authorized by both jurisdictions.

Many London banks, insurers and asset managers adjusted their legal structures ahead of the original Brexit deadline of March 29, 2019, establishing or beefing up units inside the bloc. About 10,000 new or existing financial jobs and £1.2 trillion in assets, equivalent to about $1.6 trillion, have left London since the 2016 vote, according to accountants EY.

But a post-Brexit fix isn’t so easy for two key derivative classes: single-currency fixed-to-float interest-rate swaps and two main indexes of credit default swaps. These are reasonably big markets: Notional volumes of about $20 trillion and $540 billion, respectively, cleared in the three main venues last month, according to data provider ClarusFT. EU and U.K. rules require these instruments to be traded on designated exchanges, but the regulators haven’t authorized each other’s venues.

That decision leaves the British and European counterparties that currently trade in London with a tough choice: deal only with locals on their home exchanges or trade with each other in New York or Singapore.

Robert Ophèle,
chairman of the French financial markets regulator AMF, estimated earlier this month that around 70% of the trading volume executed by branches of EU banks in the U.K. could be lost or moved to U.S. exchanges. The Bank of England also highlighted derivatives trading when it warned last week that the transition could cause “some market volatility and disruption to financial services, particularly to EU-based clients.”

EU officials could change their mind and grant British providers so-called equivalence to continue providing financial services into the bloc. But so far they haven’t, preferring to risk some pain now to bring more activity onshore and develop their capital markets. The one exception is clearing services, which got an 18-month post-Brexit authorization, primarily to allow them more time to move.

After this year’s transition phase, leaving the EU will cost Britain 2.1% of GDP with a deal or as much as 3.1% without, according to estimates by the Institute for Fiscal Studies, a U.K. think tank. European economies will suffer too, albeit less. But economic storms also throw up opportunities. When the Brexit process finally gets real next year, U.S. derivatives exchanges could pick up more European business.

Write to Rochelle Toplensky at rochelle.toplensky@wsj.com

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