Has Brexit strengthened the monetary heart of London?

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There were many dire warnings about the impact Brexit would have on the UK economy, including that it would destroy the UK’s most successful export industry: financial services. The former head of the London Stock Exchange hinted that more than 230,000 jobs could disappear in this sector.

The warnings seemed to make sense.

Leaving the European Union meant UK-based banks and other financial firms lost unhindered access to the EU market, which accounted for around 40% of UK financial products and services’ overseas sales in 2019.

Brexit has also meant that trading in most euro-denominated stocks has been restricted to EU bourses and as a result London has lost the position of Europe’s leading equity trading hub to Amsterdam for much of the past year.

But the prophecies of doom for the City – as London’s financial center is known – may have been exaggerated. Official figures for the first quarter of 2021, the first three months after Brexit came into force, show a slight increase in British financial exports to the EU despite the barriers put in place by Brussels.

“This completely refutes the predictions of the people who were in favor of staying in the EU,” said John Longworth, a businessman and former Member of Parliament for the Brexit Party. “It shows that leaving the single market was anything but a disaster. London will continue to thrive and keep getting stronger.”

This confidence seems to be widespread in the financial district. The bosses of more than two-thirds of City firms have expressed their belief that despite Brexit, London will retain its dominant role in a recent survey. Barnabas Reynolds, partner at the international law firm Shearman & Sterling, agrees.

“The city continues to be a premier global financial center, with the most competitively priced and offering financial products and services in the world. The liquidity and pricing here is second to none,” Reynolds said, adding that he was “not at all surprised” when official figures showed an increase in city exports to the EU.

But other observers take those numbers with a pinch of salt. It’s too early for Brexiteers to declare victory on the basis of a quarter’s statistics, said economist and head of CSFI think tank Andrew Hilton – especially during a pandemic.

“It is very difficult at this time to sort out the impact of Brexit itself and the impact of COVID,” he said.

Brussels is also about to launch its most serious attack yet on the city’s role as the center of European finance. The Eurocrats are now targeting the Square Mile’s derivatives clearing market, a massive $770 trillion deal.

“London is not just dominating this market in Europe,” said Jack Neill-Hall of lobby group TheCityUK. “London is the main global center for clearing. For example, more dollars are processed in London than in New York.”

It’s a lucrative business and Brussels would love to have a piece of it – but it’s also a systemic business. Derivatives clearing houses act as intermediaries between the buyers and sellers of things like swaps, options and futures. Also, they ensure that trades are settled even if one of the parties goes bust.

“The larger your clearing industry, the lower the costs and the better the risk is spread across the system. It’s like insurance. The more people involved, the safer it is,” Neill-Hall said.

This explains why much of this business has settled in a single place like London.

However, Brussels wants to spin off all euro derivatives clearing – about a quarter of the London market – and locate it within the EU. It’s bad for the city, Neill-Hall said, but worse for the block.

“For European companies, this means higher costs, fewer, less tailored and flexible products and greater underlying risk for EU business,” he said.

Despite this, Brussels continues to urge banks to move their euro clearing operations to the continent. So how secure is the city’s position as a global financial center?

While he is skeptical about the reliability of these first-quarter export statistics, economist Hilton remains reasonably optimistic about the future of London’s financial industry. He said the city has so far held up well against the EU, which has been wearing down its deals.

“Amsterdam has got some stock deals, France has got some hedge fund deals, Germany has got some banking, but there’s not a single financial center threatening London yet,” Hilton said.

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