The greatest obstacle to post-Brexit planning is uncertainty around the ability of UK financial services firms to access the single market after March 29, 2019.
Discussions around this issue are likely to go right to the wire, leaving clients and venues little time to react.
Passporting is critical for FX and money transfers, because they rely on bank accounts held in multiple countries, explains Henry Wilkes, founding partner of Institutional FX Advisory Partners (IFXAP).
“With increased compliance and regulation, institutions could lose their licences and therefore their bank accounts, making it difficult to operate,” he says.
Spot FX trading is outside the scope of Mifid II, so London should remain the global hub for this activity, which adds complexity to the decision facing institutions over whether to move other elements of their FX business.
Wilkes reckons venues will opt to apply for an EU licence to work alongside their London licence to give them flexibility.
“My sense is that we will not see a full-scale move from London, but rather the strategic use of European locations to supplement existing business models and infrastructure,” he says. “For trading business, the most popular locations are likely to be Dublin and Amsterdam.”
While informal discussions have been going on between leading clients and venues since the result of the EU referendum was announced, Thomson Reuters is the only notable player to confirm its plans.
In May, the firm confirmed it had applied to the Central Bank of Ireland for authorization to operate its FX multilateral trading facility (MTF) from Dublin rather than London, citing its expectation that Reuters Transaction Services Limited – the company that operates the MTF – would not be able to access the EU market after the Brexit date.
According to Neill Penney, co-head of trading at Thomson Reuters, the most common reaction to the announcement has been ‘why Dublin?’, since most other firms have favoured Amsterdam.
“We have announced it now because we realize our customers will have some planning to do and to reassure them that we have a plan for Brexit that will cause the minimum amount of disruption,” he says.
“The choice between Dublin and Amsterdam was a close one, but the prevalent use of common law and an English-speaking population were key factors.”
Dublin was also the most cost-effective location – which Penney says will lead to lower costs for customers – and the centre of Ireland’s growing fintech sector, which makes it a sensible base for any future expansion.
He was also keen to point out that Thomson Reuters was only moving part of its business away from the UK, adding: “Within our transactions business, the spot matching platform is staying in London.”
Thomson Reuters says it does not envisage requiring existing clients to undertake a new onboarding process to the Irish MTF, because the data required to meet its obligations under Mifid II have already been captured, although additional consents might be required.
A number of other venues contacted by Euromoney either declined to comment or stated they would make a decision when the terms of the UK’s future relationship with the EU become clear.
Grant Foley, chief financial officer at CMC Markets, observes that whilst London will remain CMC’s global headquarters, it has undertaken extensive scenario planning to help it mitigate regulatory change as a result of leaving the EU.
“We will consider a number of options, including passporting our services through one our European offices,” he says.
ParFX chief operating officer Roger Rutherford says the firm has no plans to move operations, staff or its matching engine away from London at this time.
“As it stands, London accounts for almost 40% of all currency trading, so it makes business sense for us to remain here,” he says.
However, he also acknowledges that if a substantial number of clients felt the need to establish a presence in another EU location and there was a requirement for ParFX to do the same, it would have to carefully assess the implications for the business.
C-View founder Paul Chappell reckons most clients would be sanguine about the prospect of their FX business being done outside the UK, and IFXAP’s Wilkes agrees, although he also advises market participants to carry out due diligence on all their service providers and trading venues, and monitor future performance.