P&M Notebook: the beginning of the end of the phoney war
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People and MarketsCommentP&M Notebook

P&M Notebook: the beginning of the end of the phoney war

The UK won’t be able to start Brexit talks until after its general election is over but markets and regulators are getting on with business anyway.

Most obvious for GlobalCapital last week, which spent part of the week with UK plc’s funding teams at the Association of Corporate Treasurers annual conference in Manchester, was the extent to which borrowers aren’t hanging about waiting for decisions. There were few worries about UK capital markets, and banks hailing from right across Europe and Asia are still queuing up to lend money to UK corporates, but it’s the European Investment Bank that will be sorely missed.

The EIB provides below market funding to utilities, housing associations, universities, hospital and so on. Perhaps more crucially, it writes the big cheques needed to get mega infrastructure projects off the ground, from the Thames Tideway tunnel, or 'super sewer', to the world’s largest offshore wind farm.

It is adamant that it’s lending as normal to the UK — but legal uncertainties are causing delays, and treasurers are looking elsewhere to secure funds in the future.

In euro clearing, too, there’s little point hanging around, and some big banks are already reported to have switched euro clearing business to the eurozone. The fight over where euro clearing is located has become emblematic of the broader fight over the City’s status as a financial centre, with fantastical figures like “100,000 jobs” said to depend on the location of clearing bandied around by the London Stock Exchange’s chief executive.

The only way you can get to this sort of spectacular figure is through heroic assumptions about where every trader and syndicate manager and purchaser of euro-denominated product needs to be located. But Eurobonds were listed in Luxembourg and cleared in Brussels well before Britain joined the EEC, and certainly before the bloc developed a financial services passport. Plenty of business which is cleared in DTCC, or the Moscow Exchange Group, or Dubai is arranged in London — local institutions will be the official counterparties, but central risk and credit committees, executive boards, coverage teams, end-investors, syndicate heads and traders may all sit in the UK. It can be done.

That’s lucky, because it seems unlikely that the UK can win the fight on euro clearing if European authorities are determined enough. Yes, plenty of dollar-denominated derivatives clearing happens outside the borders of the US, but just ask BNP Paribas, recipient of an $8.9bn fine for handling dollar payments to US-sanctioned countries, whether US authorities have lost control of who uses the dollar and how.

The next big question will be how the European Commission’s Capital Markets Union project pans out. The Commission’s next worked-out draft is due to be discussed on June 7, and is said to amend the existing plans to lay the groundwork for the promotion of a proper capital market in the EU27.

When it was announced, the CMU project was seen as a UK trump card. The Commissioner promoting it, Jonathan Hill, was a UK conservative in the pro-European tradition, and toured the continent tirelessly arguing the case for freer, deeper and more integrated capital markets, while many City-based market practitioners felt certain the UK’s financial services industry would be the big beneficiary of any large move from loan to bond financing in the European economy.

Fast-forward past the Brexit vote and the triggering of Article 50, and the project, which has stalled a little since June 24 2016, has been recast as a way for Europe to move forward without the UK.

Of course, getting any European legislation passed is fraught with difficulty. The negotiations on how to make securitization “simple, transparent and standardised” are breaking down, with the three European institutions – Council, Commission, and Parliament – at loggerheads over how restrictive the new regulation should be.

A deal of some kind will be done — but thanks to Brexit, it will almost certainly be more limiting and anti-market than the deal on the table beforehand. The tough talk at the top will carry on, both from the UK government and EU negotiators. But on the ground, the effects are starting to be felt.

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