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Brexit One Year On: How has the Trading Infrastructure Landscape Changed?

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A year on from the UK’s exit from the EU, financial markets across UK and Europe have remained relatively healthy, and trading has continued across all asset classes without any major disruptions. Back in April last year, we reported on how firms were navigating the post-Brexit trading landscape, focusing on the preparations that trading venues and market participants had made in the run-up to the transition, and how things stood at that point.

In this article, we look at how have things played out since then, particularly from a trading infrastructure perspective, and what the future may hold.

An evolving landscape

It’s probably fair to say that the impact of Brexit on the financial markets has been less disruptive than many had feared. It’s true that  Amsterdam quickly overtook London to become the dominant location for share trading, as volumes in Euro-denominated shares switched to the Dutch capital, where Euronext has an office and Cboe Global Markets (the former Bats) and London Stock Exchange Group’s (LSEG) Turquoise chose to locate their post-Brexit operations.

But predictions of mass relocations of operations and staff to the continent have proved wide of the mark. In fact, according to recent data from EY, many of the largest investment banks operating out of the UK have now revised downwards the number of staff relocations to continental Europe. The current number of Brexit-related job moves stands at just under 7,400 according to EY, far less than the tens – or hundreds – of thousands that some were envisaging.

However, it’s clear that the shifts are ongoing. “Post-Brexit, Amsterdam was the notable winner for equities and we’ve seen different segments in the market ecosystem gravitate to other locations,” says Emma Wheeler, Chief Commercial Officer at Pico, a provider of  trading technology, data and analytics managed services. “Large banks’ sales and trading departments and some quant hedge funds have moved to Paris, investment funds to Dublin and Luxembourg, etc. This theme has also played out across venues, too, creating a fragmented market landscape which has presented opportunities and challenges for trading technology and connectivity.”

It’s likely that more relocations will take place in the coming months and years, particularly once COVID travel restrictions are lifted. And one of the key questions that UK financial institutions face is whether to opt for branch or subsidiary status in EU. To date, rather than setting up full subsidiaries, many firms have opted to create branch offices, allowing them to establish a European presence without the burdensome regulatory and tax implications of operating a subsidiary in the region.

“We’ve seen lots of new branches being set up on the European mainland including Frankfurt, Paris, and Amsterdam, as well as Dublin, over the past few years, to comply with regulations,” says Yousaf Hafeez, Head of Business Development at BT Radianz. “But we’ve yet to see anyone moving their technology en masse to mainland Europe due to Brexit.”

Euronext’s risorgimento?

One compelling event that could trigger more firms to migrate their technology to Europe is the upcoming relocation of Euronext, from the InterContinentalExchange (ICE) facility in Basildon UK, to Bergamo in Italy. Planned for completion in June 2022, the move follows Euronext’s acquisition of Borsa Italiana from the London Stock Exchange Group (LSEG) last year.

“Basildon was built to be a financial ecosystem hosting a number of European markets within its facility, but it never quite ended up that way,” says Shamir Parmar, VP, Product Management at Options Technology, a managed service and IT infrastructure provider. “Now it’s become a case of political sovereignty: Why would you have a European matching engine for your continental European markets in the UK, when the UK isn’t part of the EU anymore?”

Why indeed? It’s a good question, but there are a number of European exchanges and MTFs, such as Cboe NL, TradeWeb and others, that continue to operate their matching engines out of data centres in UK, such as the Equinix LD4 facility in Slough, just west of London.

The Euronext move is a significant event, and one that firms had not necessarily budgeted for, which has led to something of a shakeout. “We’re seeing some firms in Basildon choosing not to move to Bergamo, in particular firms that predominantly trade futures with ICE as their primary market,” says Jeff Mezger, VP of Product Management, Financial Markets at TNS, a trading infrastructure and connectivity provider. “But on the flip side, we’re now seeing other customers becoming much more interested in Euronext with the Bergamo move. For example, for customers currently collocated at Borsa Italiana in Milan, the move is much more compelling, and although Borsa Italiana isn’t going to be live in Bergamo on day one, there is a roadmap for it being added next year.”

Some firms are holding a watching brief to see how things play out following the move. “Whether Euronext will continue to get the liquidity in there or not, is the question,” says Bill Fenick, financial services infrastructure consultant. “That’s what everybody’s interested in. And we’re not going to know that until after the move.”

The land grab for clearing

While the trading landscape is showing signs of settling, the future is a lot less clear from a post-trade and clearing perspective. In September 2020, the European Commission set a time-limited equivalence period for UK-based CCPs, originally due to expire on June 30, 2022. Recently, however, Mairead McGuinness, the EU’s Commissioner for Financial Services, Financial Stability and Capital Markets Union, proposed an extension of that period. In December, the European Securities and Markets Authority (ESMA) confirmed that banks and asset managers can continue to use the UK’s two biggest clearing houses, LCH and ICE Clear Europe for the clearing of Euro derivatives beyond the June deadline, although no decision has yet been given on the length of the extension.

“European hubs don’t appear to have the capacity to cope with the volume of clearing and settlement undertaken in London at the moment,” says Hafeez. “So the current process is going to carry on for some time. The EU appears to be pushing for more and more clearing to take place within its jurisdiction, and it is very likely it will happen eventually, but it will take time.”

European exchanges are certainly keen to get a bigger slice of the multi-trillion Euro clearing pie. “The clearing of derivatives, particularly Euro-denominated derivatives, that’s where the real fight is going to happen,” says Fenick. “Exchanges these days make a lot more money from clearing, and the data, analytics and technology they sell, than they do from trading.”

Managed Services & Cloud

With the increased liquidity fragmentation between UK and EU, and with so much uncertainty remaining around where liquidity will concentrate and where clearing will eventually end up, can technology providers do more to help firms navigate their way through?

“The need for borderless trading between and within regions, and the growth in liquid electronic markets, is driving clients to review and re-architect their trading and data technology stacks,” says Wheeler. “It’s a theme we also see reflected globally, triggered by market electronification and borderless trading: How can clients optimise their infrastructure and market connectivity and access increasing volumes of data in this new fragmented market?”

One approach gaining in popularity is to work with managed service providers that can offer trading infrastructure ‘as-a-Service’ across locations in both UK and EU.

“One of the benefits of using managed service providers is that firms have no infrastructure, they have nothing under their names, so they’re not hit by the tax obligations of the local, regional country where they’re trading,” says Parmar.

“By working with a managed services provider, you’re operating on a leasing model, so you don’t own any hardware, you don’t own any telco and so on,” adds Mezger. “That can obviously simplify a lot of things.”

Access to cloud-based services is also becoming increasingly important for firms looking to achieve borderless trading, particularly those following digitalisation initiatives.

“What we’ve seen in both the UK and Europe is a continuation of firms modernising their infrastructure and making more use of the cloud,” concludes James Maudslay, Digital Industry Lead for Insurance and Financial Services at data centre operator Equinix. “It’s all about digital services and making that shift from physical towards digitised ‘pay as you go’ type deployments. What’s going to be interesting to see is how that evolves.”

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