The weakness of the UK’s Brexit negotiating position is not fully appreciated and the consequences for securities finance businesses could be worse than assumed, according to Bertrand Huet, senior vice president & partner at FleishmanHillard.

Brussels-based Huet warned the delegates at ISLA’s post-trade conference yesterday that four fundamental factors that are being underestimated – the asymmetry of the UK/EU negotiating position, the disappearance of a single market option (or equivalent), the political will of the remaining EU27 to force a “hard” deal as well as the adverse timing and sequencing of negotiations.

The political backdrop will indeed be highly volatile until 2020. There will be presidential elections in France and Germany in 2017 and EU elections in 2019, among several other popular votes and referendums. Amid a populist surge across Europe, mainstream political parties are determined to push hard to undermine enthusiasm elsewhere for leaving the bloc.

The political turbulence comes at a delicate time for securities finance in the EU with reviews of short selling, EMIR, AIFMD, CSDR in 2017 as well as implementation of MiFID II in 2018 and work towards the Capital Markets Union (including post-trade) spanning 2017-2020.

However, the pessimistic view was not universally shared. A delegate from the floor argued that the UK response will come from a strong position, given that financial services are just a part of the wide-ranging negotiations. Several other conference delegates privately shared this view.

Panellist Habib Motani, a partner at Clifford Chance, said: “This is not just an issue for the UK – it is for the EU27 as well. There is no doubt the UK has the biggest amount of work to do but there is a certain amount of that to be done on the EU side.”

He added that there is a monumental exercise to make arrangements continue to work post-Brexit. “It is not just a case of keeping something in UK law – there may be a reference to things being determined by ESMA, which obviously post-Brexit the UK would not accept.”

Eyes on the prize

The panel discussed early anecdotal evidence of the fallout from Brexit. Kai Schaffelhuber, a partner at Allen & Overy, noted that certain international institutions using the UK as a passporting hub are urgently seeking new licences in other EU countries, particularly in Frankfurt. “There is rather no doubt in the market that there won’t be passporting rights post-Brexit, possibly after a transitional period. Everybody is thinking about how to reposition their business.”

He added that the possibility of third-country firms synthetically replicating a hub in the EU has effectively been ruled out. “Banks will need a new passporting hub in the EU. The question is basically whether it will be Dublin, Paris, Amsterdam or Frankfurt.”

The French employment law and tax environment seems to work against Paris – despite its overtures to the market – and the relatively small size of the Irish economy means it is likely to come down to Frankfurt. Schaffelhuber added that it is likely that the large operational bases will remain in the UK, being supplemented with a hub in the EU of sufficient size to qualify for passporting. “The question is – what do you need for a passporting hub? How many people would need to be transferred so you could near-source back to a large branch in London?”

Another outcome is the fragmentation of the City, with regional EU centres attracting niche areas. A popular view was that New York would be the main winner.

Andrew Dyson, CEO of ISLA, noted that existing EU legislation will continue to be applied in the UK and the FCA has confirmed that everything “currently in flight would land in the UK regardless of the regulatory oversight” arrangement.