The government’s search for something that could be claimed as a potential Brexit dividend for the City is, frankly, not going well. Apart from the Solvency II reforms for insurance companies and the lifting of the cap on bankers’ bonuses, there is very little to show for its efforts so far.
Jeremy Hunt unveiled his Edinburgh Reforms a year ago. These were designed to “seize on our Brexit freedoms to deliver an agile and home-grown regulatory regime that works in the interest of British people and our businesses”. Yet few of the proposals he listed could really be described as significant opportunities to diverge from the EU.
One issue the Chancellor highlighted was a possible move to settle financial trades faster in the UK. Announcing the formation of an industry-led Accelerated Settlement Taskforce, he said switching from the current industry standard of two days (T+2) would reduce counterparty risk and increase operational efficiency.
The subject assumed greater urgency a few months later when the US announced it would switch to T+1 from May next year. Some City Brexit enthusiasts suggested this was an opportunity for the UK to steal a march on the EU — a quick move to T+1 would limit any loss of competitive advantage relative to the US and gain an edge over the EU, which was bound to react at its usual pedestrian pace. The UK might even be able to win back some of the trading that has leaked into the EU since Brexit, they said.
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But anyone in the government who might have shared this view has been quickly disabused of it by the industry, where there is widespread scepticism about any rushed move to follow the US.
Lobby group UK Finance said in a recent paper that moving to T+1 “presents a host of compelling opportunities to deliver material benefits for UK capital markets, but also a host of challenges that could undermine the attractiveness of the UK capital markets”.
On balance, would it be sensible for the UK to press ahead as quickly as possible? “We just don’t know yet,” says Ayesha Ghafoor, UK Finance principal for capital markets and wholesale policy. The group recommends that the UK should wait to see how things go in the US, then carry out a thorough cost-benefit analysis to enable a more informed decision to be taken in about mid-2025.
READ UK tries to keep up after US pushes ahead on T+1
As for the idea of capitalising on the ability of the UK to move faster than the lumbering EU, Ghafoor says firms strongly support a coordinated approach with the EU. “It is to everyone’s advantage for the EU and the UK to work closely together,” she says. She adds that misalignment between jurisdictions could lead to market fragmentation, and would be much worse within Europe than between Europe and the US.
There is certainly no sign in the EU of a mad dash to keep up with the US — the complexities of its capital markets make the challenges even greater than in the UK. But moving to T+1 in the EU should not be a question only of “when”, but also “why” and “how”, according to Pete Tomlinson, head of post trade at AFME, which is the voice for wholesale financial markets across Europe.
Peer pressure
So would the City be missing a trick by not moving fast and getting ahead of the EU?
Some observers see clear benefits from an early move. Cboe Clear Europe’s president Vikesh Patel says firms doing trades in T+2 jurisdictions would gain from moving to a T+1 UK, primarily because of its lower margin requirements.
But he concedes the impact on competitiveness is less clear. “It is hard to see that it would be enough for them to switch trading. Ultimately, people will trade where there is good price formation and good liquidity.”
Ghafoor argues that it might actually be more attractive for international investors to do a trade in the UK under T+2 than in the US under T+1, if it involves a currency transaction. This is because global currency trades settle in two days and it would be easier to have the two transactions settling over the same period.
Other concerns about an early switch include the cost of implementing new systems. That is particularly true for smaller firms, as they are already having to cope with many other regulatory changes.
To be fair, there is no sign that the task force is dragging feet. Chair Charlie Geffen has said it tried to speed up the process by producing a final report by the end of the year, rather than an interim one as originally planned.
The industry’s caution must be very frustrating for those who saw Brexit as an opportunity for the City to break free from the stodgy EU and align with the dynamic US. But in the real world, things are a bit more complicated than that.
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To contact the author of this story with feedback or news, email David Wighton
