Brexit will accelerate the evolution of a Capital Markets Union.

Brexit will accelerate the evolution of a Capital Markets Union.

According to a survey conducted by SIX Securities Services, over half of financial organizations (53%) questioned believe plans for a Capital Markets Union (“CMU”) will speed up in the wake of Brexit.

The question as to whether Euro-clearing will remain in London after Brexit has been at the center of Brexit negotiations since the vote to leave Europe was cast in 2016. Aside from the question mark hovering over this issue, research from SIX Securities Services reveals that financial organizations appear to have broader concerns.

Over half of financial organizations across Europe (53%) believe that a CMU will evolve faster due to Brexit, and four in ten organizations think that it will provide a solution to collateral availability within two years. Buy-side organizations are more optimistic than the sell-side: – 53% of buy-side respondents believe this development will solve the problem of limited available high-quality collateral "fairly soon", while 70% of sell-side respondents think that such a solution will not present itself in the short term. One reason as to why the CMU is being viewed as a possible solution to this problem is that it will enable the European Commission to distribute corporate debt into the markets, much like the US model, thereby alleviating collateral demand pressure.

Respondents were also questioned as to whether they are preparing to shift a portion of their trading, clearing and collateral back into their respective currency zones post-Brexit. 45% of organizations said they are and they envisage moving over half of their activities (53%). Larger organizations, with assets of over USD 100 billion under management, are most likely to move activity (61%), whereas only 38% of organizations with assets of under USD 50 billion are planning to move some trading activity.

I believe the principles and intent behind a CMU make good economic and commercial sense over the longer term for the EU. As to whether Brexit will actually accelerate the evolutions of a CMU, on this point I am less convinced. Capital will move to a location where the market can best make use of it quickly and efficiently. In this regard, I do not see the EU as the only option.
Global companies will also evaluate other locations based on their specific business models, including potentially New York, Singapore or even Switzerland. There appear to be increasing strains on EU unity, and I think that both the UK and EU should be deeply concerned about this. The movement of specific functions such as trading out of the UK is to my mind potentially misleading. Financial services is now such a global business that I think the location of the delivery of services will be based on where the best and most qualified people can be found. This know-how and these resources cannot be replicated that easily elsewhere.

Thomas Zeeb, Division CEO, SIX Securities Services