Bank of England intervenes in UK-EU financial market row

• Bank of England (BoE) steps in on the UK-EU row over financial regulation divergence
• Firms wanting to relocate to the EU will now have to seek approval from the Bank of England
• EU accused of trying to poach business from the City of London
• Nomura and Credit Suisse warn of huge losses after a GBP 15BN firesale by Archegos Capital Management

The British government has asked the Bank of England (BoE) to step into the UK-EU Brexit-driven row over financial market regulation after witnessing a high number of firms relocating to the EU.

According to the latest reports, UK businesses wishing to relocate to the EU will now be required to seek approval from the BoE before moving their operations.

It comes amid claims that the EU has devised a plot to poach businesses from the City of London by refusing to grant equivalence to the UK financial centre.

The Bank of England has now drawn up new restrictions to reduce the number of firms relocating to financial capitals on the other side of the Channel. All firms must notify the central bank of their intentions if they are looking to leave the UK.

One senior bank official described the new measures as a “regulatory over-reach”, with another stating that companies are now caught between a rock and a hard place – the EU’s gambit and the BoE’s demands to restrict movement.

UK-EU negotiations concerning a Memorandum of Understanding (MoU) have now concluded. Although both sides agreed on a new post-Brexit financial service pact, it is believed that the bloc will still not grant UK financial markets equivalence.

Can the UK and the EU overcome their differences?

Britain and the European Union have already begun diverging on financial regulation, and broader hopes for a comprehensive agreement on equivalence have faded post-Brexit.

The EU’s refusal to grant London equivalence means that firms are now operating between regulatory frameworks. Even the new co-operation deal does little to open up access to the EU for the City of London, says Huw Jones, Reuters Europe regulation correspondent.

For Britain to be granted full equivalence, the bloc would need to approve access across 40 different activity areas. Currently, the EU has granted London equivalence in two areas, far less than the UK, which has approved 17 spheres for the bloc.

There is also a documentation issue revealing that the European Commission has delayed granting equivalence to poach London firms.

Bank of England Governor Andrew Bailey commented on the issue and claimed it “would be a serious escalation of the issue.”

The EU has hit back at the highly controversial claims and insisted it would grant the City of London equivalence when the UK guarantees that it will not discard current standards and regulations.

Post-Brexit, Britain already announced tweaks to areas including the rules surrounding equity, fixed income and commodities trading, all of which contrast the EU’s philosophies on financial market regulation.

Among the potential changes are rules instructing business to provide information regarding stock and bond market trades made before and after completion, removing limits on the number of commodity contracts trades can hold, and caps on private trading.

The European Union is keen to create a harmonised internal capital market, whereas Britain appears to be aspiring to incorporate plans that restore powers and offer regulators greater freedoms. However, Baroness Donaghy warned that this could result in “ministers with less ability to scrutinise rules and hold regulators accountable.”

What financial impact has Brexit had on the City of London?

After the Brexit transition period, Britain’s GBP 130BN financial services sector lost access to Europe’s market – a loss in many respects, given that the EU, as the UK’s largest customer, was worth approximately GBP 30BN a year.

As financial services were not included as part of the UK-EU Brexit deal, British firms suffered a significant financial hit as any future access to the EU’s system will depend on whether the bloc grants the UK’s financial sector equivalence.

That said, both sides have taken some promising steps in their future relationship, after agreeing on a co-operation pact and signing a “Memorandum of Understanding” (MoU) that should hopefully restore access to Europe for the City of London.

What is the Memorandum of Understanding?

The MoU develops a new forum inherent in voluntary regulatory co-operation to provide the United Kingdom and the European Union with a platform to discuss financial services issues.

While both sides cannot negotiate market access via this platform, it is hoped that the new Joint UK-EU Financial Regulatory Forum will lead to an agreement on equivalence.

What is equivalence, and why is the EU reluctant to grant it to the UK?

“Equivalence” refers to an EU system that grants lenders, financial institutions and insurers from other countries access to the bloc’s market, providing that the other state’s legal requirements for financial regulation are equivalent to the European Union.

The EU grants equivalence decisions based on proposals from the European Commission and subject to the EU Council’s approval. However, some companies may be required to obtain additional permission even if their country has been granted equivalence status.

Equivalence can also be unilaterally withdrawn by the EU with one month’s notice, making it an undependable system. However, British politicians hope to persuade the bloc to improve the system through discussions via the new Joint UK-EU Financial Regulatory Forum.

Currently, Brussels has only granted the UK equivalence on two areas of activity and admitted that it is in no rush to award Britain with access to its market. Instead, European leaders want to prioritise strengthening capital markets in the euro area to reduce its reliance on London’s financial centre.

The EU has also said that it will also delay granting the UK equivalence unless parliament outlines how far it wants London to diverge from Europe’s rules, fearing that Britain will gain a competitive edge over the bloc’s banks.

Last year, UK Prime Minister Boris said that the United Kingdom would not be applying some EU rules, and it has come to light that parliament also has plans to ease listing rules, which would make Britain a more attractive destination for tech firms to operate .

Regulators have already begun lifting curbs on anonymous share trading, which will increase the UK’s global appeal but goes against EU philosophies. While the United Kingdom insists that it will not tear away from any rules agreed on a global level or lower its standards, the bloc demands more information.

However, limited access to the Union’s financial market has forced several British companies to relocate to the bloc to avoid further disruption – much to the EU’s delight.

Approximately 7,500 jobs and more than a trillion British pounds (GBP) worth of assets have been relocated to the EU in the wake of the Brexit deal despite measures introduced by the UK government to avoid fractures in business with clients in Europe.

In other news, global financial services Credit Suisse and Japanese bank Nomura have warned they could see steep losses after a stock GBP 15BN firesale (USD 20BN) by Archegos Capital Management rang alarm bells throughout financial markets.

Nomura and Credit Suisse warn of financial hit

A GBP 15BN firesale of Chinese and US stocks have rattled global financial markets, and shares in some of the world’s largest banks have plummeted in the wake of the news.

The banking giant, Credit Suisse, said it could face substantial losses and that its quarterly earnings would be significantly affected.

Japanese bank and rival Nomura Holdings also warned that it was facing losses of up to USD 2BN by an unnamed client, which has now been identified as Archegos Capital Management, owned by the former Tiger Management protege, Bill Hwang.

Shares in Nomura plunged by 16% in the wake of the announcement, while Credit Suisse stock is down by 14% at 10.68.

The declines are believed to have been triggered by a massive sell-off in shares by Goldman Sachs and Morgan Stanley, which exited most of its positions after Bill Hwang was forced to sell USD 20BN worth of stock due to wrong-way bets.

Prime brokers exercised their right to liquidate trading positions which amounted to almost USD 30BN in value, and a dash-to-sell was triggered in stock markets as other traders raced to sell shares and avoid loss.

Investment banking company, Deutsche Bank, was also exposed to the Archegos sell-off. However, unlike Nomura and Credit Suisse, losses are likely to be immaterial, a source told Bloomberg as the bank had hedged most of its exposure.