The UK and European Union are deeply interconnected when it comes to capital markets, with 80% of EU capital markets activity managed and conducted out of the UK. With Brexit proceedings commencing at the end of March, financial firms in the UK are starting to prepare for the considerable impact on their operations, including market volatility, relocation of headquarters and staff, trade disruption, and changes to regulatory mandates.
Particularly with the issues of relocation and compliance, now is the time for European firms to re-evaluate their trading technology.
Headquarters and Staff Relocation
One of the primary risks of the Brexit is the loss of passporting rights, which allow institutions established and regulated in any country within the EU to do business in another member country without having to secure authorization. The UK is the most active country currently using these rights, with UK-based firms accounting for over 75% of all passporting activity in the EU. UK firms would need to maintain a local presence in the EU to continue enjoying passporting rights.
The loss of passporting rights as well as the loss of the ability to clear the Euro in London has many financial firms evaluating if they want to retain their European headquarters in the UK. While many predict a small movement at first, a chain reaction will likely occur as banks follow their clients, and vice versa. In addition, many UK-based firms will likely face regulatory pressure to develop a more significant presence in continental Europe to effectively conduct business. For now, a UK firm may only need 5 people staffed in the EU, but in a few years, that number may increase to 50 or 100 employees.
In addition to disrupting business operations and the lives of employees, the cost of a move for a financial firm is substantial. Rerouting trader voice communication lines alone can cost firms tens of thousands and can take weeks to properly implement.
For firms considering a move, this period of transition provides best time to re-evaluate current technology for solutions that will cut costs and reduce the disruption caused by relocation.
The UK’s transition away from the EU will take at least two years, with some experts projecting it could last up to a decade, and will involve negotiating everything from customs to energy policy. During this time, the UK will be an acting member of the EU, meaning that all current legislation will be implemented in full – including the upcoming MiFID II regulations, set to take effect in January 2018.
While it is likely that the UK will need to maintain equivalency with EU regulations in order to continue doing business, the UK will have to establish their own set of regulatory mandates for financial industry. With frequently changing sets of regulations in their future, financial firms have the burden of keeping their systems and technology updated, often a costly task.
Now is the time for firms to make the necessary equipment upgrades and replacements for systems that are more adaptable to changing compliance regulations.
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