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Bankers talk of being sold out as London waits for its own Brexit deal

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Despite a breakthrough last month, London-based bankers are nervously waiting for the UK and Brussels to agree on a post-Brexit relationship for their financial services industry.

The UK and EU agreed to continue talks and cooperation on financial services on March 26th. In a brief statement, the UK and EU announced that they had completed technical negotiations on a “Memorandum of Understanding” for the industry and a framework for “voluntary regulatory cooperation”.

The document was widely expected to be published before the end of March and formal approval is still to be given, a matter which, according to the published text, “can be dealt with quickly”.

Even so, bankers who spoke to CNBC believe the industry has been neglected time and again during the Brexit talks, and they are not confident that the deal will change the outlook, especially since regulatory cooperation is voluntary and not binding on the EU will be.

The UK Treasury did not specifically respond, referring to CNBC’s statement on the Memorandum of Understanding.

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Financial services account for 7% of total UK output and 10% of government tax revenue, but the industry was not part of the December 24th “zero-rate, zero-quota” deal as the matter was negotiated separately.

The EU has not yet committed itself to binding legal equivalence – with UK regulation being seen as equivalent to its own – as each country has to make its own choices: Italy, for example, has retained equivalence while the Netherlands has withdrawn it.

The lack of an agreement meant that as of January 1, the UK’s central counterparties had to be recognized by the European regulator to continue to allow billions of euros to be traded in OTC financial derivatives for EU banks. There was a slight relief that EU banks were given 18 months to reduce their exposure to these UK clearinghouses. The time-limited approval expires in June 2022. Earlier this month, the UK regulator also renewed its commitment to giving UK-based banks the ability to trade these derivatives on European platforms.

However, due to the timestamp, it has put European banks with UK branches in an uncompetitive position and has already weighed heavily on trading volumes. IHS Markit released data in February showing that the UK’s share of trading in euro swaps (a type of financial derivative) fell from 40% in July 2020 to 10% in January 2021.

Amsterdam also overtook London as the largest trading center for cash stocks in Europe in January. CBOE Europe told CNBC that this was “unprecedented” and likely to be permanent.

All of this has resulted in London-based banks having to take staffing measures to ensure continued access to trade. Bank of England Governor Andrew Bailey said in January that around 7,000 jobs have moved so far as a result of Brexit, less than feared, but there could be more ramifications.

Goldman Sachs had already begun moving bankers to regional offices in recent years and expanding its teams in Milan, Madrid, Amsterdam and Stockholm. Since Brexit, the move to Frankfurt and Paris has accelerated. A source from the bank, who preferred to remain anonymous as they were not allowed to speak publicly, said several hundred employees had moved and that the bank had added new licenses and real estate and improved execution capabilities. They also expanded the Dublin wealth management office.

European banks with branches in London, such as Deutsche Bank, have also moved staff to the continent, only a few hundred altogether, including those serving EU clients. Most of the move took place in Frankfurt, the headquarters of the bank.

Barclays has spoken of “minimal” staffing impact on the continent. Sources have told CNBC that the number is likely to be in the low hundreds as well. The main resettlement cities are Paris and Dublin, where Barclays has established a headquarters for its European unit.

The Goldman Sachs banker told CNBC, “What politicians miss is that it’s not about the few hundred bankers who have moved … but that the revenues associated with those employees are booked and taxed in Europe, not to mention from all.” the other personal taxes and consumption that come with it. ”

“Politicians protected the fish but sold us bankers down the river,” they added, referring to the catch quotas agreed for the Brexit deal on December 24th.

Another Barclays banker, who also spoke on condition of anonymity as he had no authority to speak publicly, told CNBC that it was important to distinguish between the short-term and long-term effects of Brexit.

“In the short term, it is pretty clear that Europe will try to bring as many jobs as possible from the UK to Europe (mostly after high-paying jobs). The clearing and all financial infrastructure will be more difficult to move. The key question will be, ‘Where is your European center and with which unit do you book everything, the United Kingdom or the European? “.

The source added, “If US banks decide to stop using the UK company, it will mean more job relocations in the middle and back offices. Ultimately, you will see London and Paris as competing centers for financial services.”

Another concern of another Morgan Stanley banker, who also spoke to CNBC on condition of anonymity, is that “while many temporary equivalency decisions have been made, there is no guarantee of renewal. It is therefore expected that more people will move in the coming months and years. ”

Many professionals in the UK capital are not optimistic that the Memorandum of Understanding can reverse both trade and personnel movements towards the continent. The river was a way.

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Robert Dunfee