As Britain finally cuts ties with the EU, the Brexit trade deal leaves the future uncertain for financial services.

The trade deal is limited for the financial sectors who are accountable for 7% of the UK’s economy and 10% of its tax receipts.

The loss of Passporting and the uncertainty of what is yet to come for the clearing of euro-denominated derivatives have left many across the industry wondering what this means for them.

One thing we know for sure is that the trade relationship between the two will never be the same again.

What The Loss of Passporting Means For Financial Services

Passporting was by far one of the most important issues for trading post Brexit, and since it is no longer available the British based financial services can not trade freely with the EU. 

The free access between the UK firms to the EU market and vice versa has ended, and a temporary permissions regime (TPR) has been put into place by the FCA.

For now, the extent to which UK firms can continue to provide services to customers in the EEA will be dependant on local law and local regulators’ expectations. 

The Treasury has also given the FCA new powers to make transitional provisions known as the temporary transitional powers (TTP) to help businesses adapt to new rules.

Over the next few months, the financial sectors must prepare for any regulatory changes that will come into force.

Clearing of Euro-Denominated Derivatives

Another particular issue that is affecting the financial services post-Brexit is euro clearing. 

So what exactly is euro clearing? It is the process by which a third party organisation ‘clearing house’ also known as ‘central counter party’ acts as the intermediary between a buyer and seller of financial contracts.

The European derivatives market topped 680 trillion euros ($834 trillion) and the majority of this takes place in London. 

In fact, not only is London the top leader for euro clearing but it is also the world leader for clearing all types of currency and responsible for almost one-third of the global market. 

The European Securities and Markets Authority has allowed the current clearing arrangements to continue until June 22.

They want to give the EU based firms more time to reduce their reliance on the British-based clearers and minimise the cost of disruption and fragmentation in businesses.

But the EU has made it clear that they want to introduce a strict location policy to have euro-denominated derivative to take place in the EU or somewhere that has “equivalent” regulations.

Looking Ahead

With much at stake, both Britain and the EU have agreed to release a memo of understanding by March on ‘equivalence rules’.

We need a mutual recognition agreement to reduce the jobs at risk across the financial sectors such as banking, insurance, fund management, legal services, securities and many more. 

The Covid-19 pandemic, the current global crisis and the rise of Bitcoin have also left a lot of uncertainty about what is yet to come for the financial services industry.

At the moment, we don’t know what the new arrangements will be and we can only hope by March there will be more clarity about the clearing of euro-denominated derivatives.