Billions of dollars worth of stock and derivatives trading has already vanished from the British capital after the United Kingdom completed its exit from the European Union on Jan. 1, shifting abroad to financial hubs in Amsterdam, Paris and Frankfurt. And the threat of more lost business hangs above the city, home to dozens of the world's biggest banks, hedge funds and insurance companies. Financial services were not included in the UK-EU trade deal agreed by British Prime Minister Boris Johnson on Dec. 24, putting Brussels in a position to decide how much access UK-based companies will have to the vast EU market. "I'm not predicting the end of London as a major financial center, but I think it's in the most precarious state it's been in for a long time and cannot be complacent," said Alasdair Haynes, the CEO of Aquis Exchange, an upstart rival to the London Stock Exchange and the CBOE.
Trouble for London means trouble for the United Kingdom. Financial services are the source of almost 11% of government tax revenue, according to PwC research. In 2019, the sector contributed £132 billion ($185 billion) to GDP, or nearly 7% of the economy's total output. Half of that was generated in London, where more than a third of the sector's 1.1 million jobs are located, according to the Office for National Statistics.
While more than half of Britain's finance sector revenues are domestic, any loss of tax receipts, jobs and business to rival financial markets deals a blow to the UK economy as it emerges from its worst recession in more than three centuries. Early losses In the absence of a deal with the European Union on financial services, there are already signs that London's undisputed position as Europe's top financial city is at risk. Within days of the Brexit transition period ending at midnight on Dec. 31, London lost its ranking as Europe's largest share trading center to Amsterdam because EU financial institutions can no longer trade euro-denominated shares on UK exchanges. An average €9.2 billion ($11.2 billion) of shares were traded daily in the Dutch capital in January — a more than fourfold increase from the previous month. The daily average across all shares in London fell by nearly €6 billion ($7.3 billion) to €8.6 billion ($10.5 billion) in January, according to data from CBOE Europe. Huge volumes disappeared instantly. More than 99% of Aquis Exchange's European share trading moved from London to its Paris venue immediately following Brexit, according to Haynes. "Almost never do you see liquidity shift overnight," he told CNN Business.
London's share of trading in euro-denominated interest rate swaps, which are used to hedge against moves in interest rates, also collapsed from nearly 40% last July to about 10% in January. EU trading facilities accounted for about a quarter of the market in January, up from less than 10% in July, according to data provider IHS Markit. Trading on US venues doubled to 20%, in a sign that New York could also stand to gain from London's woes. Analysts caution against reading too much into these early losses, but acknowledge they could be the start of a slow erosion of London's supremacy. Already, EU policymakers are taking steps to understand whether the clearing of euro-denominated derivatives such as swaps, the bulk of which still takes place in London, could move to European venues, Reuters reported this week. London's big clearing houses stand between buyers and sellers of financial instruments to ensure trades are settled. Bank of England Governor Andrew Bailey said on Wednesday that Britain would push back against any attempt by the European Union to force activity out of London. "That would be highly controversial and that would be something we would have to and want to resist very firmly," he said during a UK parliamentary hearing.
The loss of finance business in London looks more dramatic when compared with 2016, the year Britain voted to leave the European Union. International financial services firms have migrated £1.2 trillion ($1.6 trillion) worth of assets and relocated 7,500 jobs from Britain to the European Union since the referendum, according to data tracked by EY and published in October. "We see this as a first wave," William Wright, managing director of London-based think tank New Financial wrote in January. It's plausible that about 35,000 jobs might move in the medium term, according to Wright. "The bigger threat for the UK in the medium term is that the EU tries to force more business to relocate," he added.
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