A trade deal would give the City of London breathing space by John Springford
The EU’s decisions on financial equivalence for the UK are formally separate from the trade deal under negotiation. But in reality, the two are linked. The British government has marginalised big business during the EU trade negotiations – and none more so than finance. By prioritising sovereignty over close economic ties with Europe, the UK has accepted that trade in financial services will be more difficult once the transition period ends. This is despite the City of London’s status as a global financial centre, responsible for a sizeable chunk of British exports and tax revenues. The City is not only a cluster of banks, markets and insurers, but also the accountancy, consulting and law firms that service them. The trade agreement that the UK and EU are negotiating offers little in practice to the sector. But the City of London is still hoping for a deal: the EU is more likely to grant equivalence in some areas of financial services if a trade deal is struck. Equivalence is a unilateral decision, taken by the European Commission, that a third country’s regulation and supervision is similar enough to the EU’s. That decision would allow British firms to provide services across the EU. In the event of no deal, access on the basis of equivalence will be limited to areas where the EU is worried about its own financial stability.
The EU has granted the UK equivalence in derivatives clearing until mid-2022, despite the spat over the UK’s Internal Market Bill. The European Central Bank (ECB) has always been concerned that ending EU banks’ access to clearing houses in London might cause financial instability. After the 2008 financial crisis, regulators tightened regulation on derivatives (such as futures and options) and mandated that some derivatives be ‘cleared’, so that if one participant in a derivatives contract went bust, the contract would be carried out without harm to the other. If the EU failed to grant equivalence on short notice, there would be a scramble to move derivatives contracts to clearing houses within the EU, which do not yet have the capacity to cope. But equivalence will be temporary, and over time both the Commission and the ECB will press for more derivatives to be cleared within the EU’s jurisdiction: neither wants to outsource regulation and supervision of a critical part of the EU’s financial system to the UK. The ECB is not convinced that equivalence decisions in other areas – the trading of shares, advice about mergers and acquisitions, and so forth – are needed in order to protect the