Withdrawal from the European Union

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  Analyzing the impact of Brexit on the cost structure of packaging industry.
• As a result of Brexit, the cost of production and prices are expected to significantly affect the packaging industry.
• Experts at Infiniti Research predict that factors such as raw material prices, cost of labor, transportation costs, and red tape costs will significantly increase.
• You may also like to read some of our recent articles on the impact of Brexit on various sectors:

Implications of Brexit for the EU financial landscape

• Brexit will result in a substantial structural change to the EUs financial architecture over the coming years.
• At the same time, the precise overall impact of Brexit on the EUs future financial architecture in general and on these specific areas in particular is difficult to predict at this stage, and may change over time.
• This special feature makes a first attempt at analysing some of the factors that may affect the EUs financial architecture post-Brexit.
• At the same time, without a high level of fluidity between the different financial centres, financial fragmentation may arise, at least temporarily.
• In order to address this concern, fostering the integration of EU capital markets is a key priority for the capital markets union.
• To this purpose, EU financial hubs will need to build capacity and interact efficiently to ensure market functioning.
• Overall, this would contribute to developing domestic capacity in areas where the EU currently relies heavily on the UK.

1 Introduction

• For some EU27 financial and non-financial firms, the City of London also represents a gateway to global financial markets.
• Brexit will change the legal framework in which financial firms will operate in the future.
• This, in turn, will determine the manner in which the EU equivalence framework will be applied to the UK.
• The EU27 will have to foster domestic capacity and develop markets in areas where it currently relies on the UK.
• To increase the effectiveness of financial markets in both scenarios, financial integration within the EU27 would need to be strengthened.
• Section 3 examines possible drivers and implications of changes in cross-border conduct of activities, including a relocation of financial activities.
• Possible policy responses, particularly in the context of the European Capital Markets Union (CMU), are discussed in Section 4.

2 Euro area reliance on the UK for financial services and relevant regulatory frameworks

2.1 Euro area reliance on the UK for financial services

• Changes to the euro area financial landscape following Brexit are likely to be concentrated on activities where the euro area currently relies on the UK the most.
• The importance of London to the euro area financial system varies substantially across financial activities.
• As at December 2019, almost 80 per cent of all euro area clearing members OTC derivatives positions were cleared through UK CCPs (Chart A.1).
• Large investment banks operating out of London also play a significant role in euro area bilateral OTC derivatives markets.
• As at August 2019, over a quarter of uncleared OTC derivatives held by euro area counterparties were sourced from the UK (Chart A.2).


Chart A.2 Geographic breakdown of counterparties to euro area uncleared OTC derivative contracts

• Global investment banks operating out of the UK are also key providers of financial services to euro area non-financial firms.
• Many global investment banks currently access the euro area market from London.
• They support access of euro area non-financial corporations to capital markets and provide a number of services.
• Chart A.3 Euro area non-financial corporations debt issuance via non-euro area-owned banks (left-hand scale: number of deals; right-hand scale: percentage shares)


Chart A.4 Euro area non-financial corporations’ equity issuance via non-euro area-owned banks (left-hand scale: number of deals; right-hand scale: percentage shares)
Chart A.5 M&A deals involving euro area non-financial corporations financed by non-euro area-owned banks
Chart A.6 Syndicated loans to euro area non-financial corporations led by non-euro area-owned banks

• So far, evidence of relocation has been mixed across sectors.
• While some uptake can be seen in Chart A.1, overall relocation of derivatives clearing has been limited (see Box 1).
• Global banks currently serving the euro area out of London have completed authorisation procedures to establish or expand their presence within the EU27, ensuring that they can continue to serve this market after the UK has left the EU.

2.2 Third-country frameworks for market access

• UK-based financial firms currently rely on passporting rights to provide services across the EU Single Market based on a single authorisation in their home Member State.
• UK-based firms will be subject to third-country regimes in EU financial services legislation following Brexit (Table A.1).
• Member States may further grant access to domestic markets for specific activities under national legislation.
• The degree to which the UK will be able to benefit from market access under EU equivalence regimes will be decided unilaterally by the EU and it will be conditional on future regulatory choices in both jurisdictions.
• Indeed, the decision to grant the UK market access under different EU equivalence regimes will crucially depend on the degree of future regulatory alignment between EU and UK frameworks.
• It will also depend on risk management considerations associated with cross-border activity in terms of impact on EU financial stability, market integrity, investor protection and the level playing field in the EU internal market.
• From a risk perspective, both current regulatory and supervisory frameworks and intentions as to future changes appear relevant.
• Where provision of financial services directly from the UK is prohibited for regulatory reasons, these services would need to be provided by entities within the EU.
• A number of factors which may drive relocation of activities are discussed in the next section.
• Where UK entities are allowed to continue providing services under the EUs third-country frameworks, there might be limited change to the current situation.

3 The structure of the post-Brexit euro area financial system

• The nature of required changes and the post-Brexit structure of the euro area financial system will be affected dynamically by regulatory and economic factors.
• The different drivers are likely to vary substantially across business models as illustrated below for selected market segments such as central clearing and investment banking.
• Brexit is therefore likely to have heterogeneous effects on different types of financial firms, activities and sectors over time.
• Individual choices of firms will also matter, depending, for instance, on market opportunities.
• Over the medium term, policies fostering the attractiveness of EU capital markets globally could enhance incentives for providing services from within the EU (see Section 4).
• So far, the main relocation operation from the UK to the euro area in terms of clearing has fostered further market efficiencies.
• [11] Euro-denominated repos are now cleared almost exclusively at euro area CCPs (largely at LCH SA)[12], enabling additional market efficiencies including balance sheet netting and access to TARGET2 -Securities.
• Chart A Repos cleared at LCH Ltd and LCH SA (monthly nominal amount) (EUR billions, 2018 -2019)
• Supply-demand imbalances and higher balance sheet costs of clearing eventually increase costs for banks that cannot use arbitrage between CCPs.
• However, competition can also have positive effects, such as fostering innovation and exerting downward pressure on fees.
• Competition between CCPs may also reduce concentration risk and a market with multiple CCPs can bring positive effects to financial stability by reducing systemic risk.
• The breadth of cross-border activity and reliance on global markets are reflected in regulatory frameworks, which largely allow cross-border access.
• Some UK-based banks are planning to transfer some activities from the UK to continue servicing the euro area (see Box A.2).
• These are largely global banks that act as intermediaries in capital and derivatives markets (see Box A.3) and provide financial services to euro area non-financial companies and governments.
• Banks may continue providing these services by establishing or expanding their presence in the euro area.
• These institutions are expected to be capable of managing all material risks potentially affecting them independently and at the local level.
• Their governance and risk management mechanisms will need to be commensurate with the nature, scale and complexity of the business, including adequate staffing of their euro area entities.
• This planned relocation of assets supports the expectation that incoming credit institutions will substantially increase their footprint in the euro area, with a view to avoiding disruptions in servicing their euro area clients after Brexit.
• Around 25 Brexit-related formal authorisation procedures related to the establishment of new credit institutions or the restructuring of existing ones have been launched in the euro area.
• Incoming banks with material capital market activities are planning to operate with a total of 837billion in capital market assets.
• Capital market business refers to sales, trading and treasury activities, excluding advisory or pure lending components.
• [14] Other capital markets business (for example commodities) accounts for the remaining 22.2% (Chart B).
• Chart B Incoming banks with material capital markets activities (percentages)
• Economies of scale seem to be present in banks that are more involved in investment banking activities, such as market-making.
• Economies of scale are present in euro area derivatives markets, while economies of scope across business lines seem more limited.
• According to granular information on euro derivatives, the list of most active dealers varies substantially across different asset classes and contract types.
• Box A.3 The role of UK-based dealers in the euro area derivatives market Prepared by Francesca D. Lenoci and Ellen Ryan Global dealers are pivotal players in trading euro area derivatives.
• [16] This box uses EMIR data to examine the role of G16 dealers in the euro area OTC markets.
• Many G16 dealers currently serve the euro area market out of London.
• Compared with euro area dealers, they tend to take larger net exposures, especially for commodity, credit and equity derivatives (net notional, see dots in Chart A, panel (b)).
• This may reflect the role of UK-based dealers as intermediaries between the euro area and the rest of the world.
• UK-based dealers are important in the euro area credit default swap (CDS) market.
• UK dealers play a prominent role in providing liquidity in the CDS market to a number of euro area sectors, most notably banks.
• [19] Meanwhile euro area G16 dealers dominate the euro interest rate swap (IRS) market, with strong directional exposures towards non-financial firms and investment funds.
• The literature on financial centres often cites ecosystem effects, whereby financial firms benefit from close geographic proximity to other institutions providing similar and complementary services.
• On the other hand, benefits arising from proximity to the client base could incentivise a more even spread of activity across the euro area.
• [20] This complex mix of incentives will eventually be reflected in the emerging structure of the euro area financial system.
• If these dynamics are confirmed, and the multi-centric structure of the euro area financial system becomes more pronounced, it will be crucial to implement policies that foster an efficient interaction between different hubs (see Section 4).
• Such a multi-centric financial system would reduce concentration risks.

4 Implications for the capital markets union

• Brexit reinforces the need to complete the capital markets union (CMU).
• [21] The CMU aims to develop new sources of funding for companies, remove barriers between EU capital markets and broaden the role of the non-bank sector.
• The CMU would improve the capital channel for cross-border risk sharing and complement the credit channel of the banking union (BU).
• It can also enhance the attractiveness of EUs capital markets more broadly on the global stage.
• Policies fostering the integration of EU capital markets would help ensure efficient interaction of EU financial hubs.
• A large-scale increase in euro area capital market activities would reinforce the case for more centralised oversight and supervision of markets.
• While Brexit could strengthen the rationale for developing and integrating EU capital markets, the relevance of the CMU agenda goes beyond Brexit.
• Therefore, a policy agenda seeking to increase the depth and efficiency of EU financial markets will need to look beyond Brexit and enhance the attractiveness of the EUs capital markets on the global stage.

5 References

• The current Astonish EU headquarters is located in London, England, and will remain the headquarters of Astonish Media Groups European presence.
• The International Committee of Astonish Media Group reviewed potential EU offices in Luxembourg, Brussels, Munich, and Frankfurt before deciding that Paris would be the ideal operational office for Astonish Media Group EU.
• Due to legal and tax implications around the Brexit of the United Kingdom from the EU, Astonish Media Group needs to adapt to the business situation and climate, said Paula Conway, President of Astonish Media Group.
• The Astonish EU headquarters is in London, England, with new EU offices located in Paris, France and Monaco, Monte Carlo.

• The EU Justice Sub-Committee has written to the Home Office, raising their concern that children in care, and other vulnerable groups, face too many barriers in applying for the right to stay in the UK after Brexit.
• The UK Government's EU Settlement Scheme is designed to allow EU nationals to continue to live in the UK after it leaves the EU; a standard application involves the use of smartphone app to verify the applicants identity and an online form for UK residence and criminality checks.
• But many vulnerable groups including children in care, domestic abuse survivors and people who are homeless are unlikely to have access to the documents they need to prove their identity and residency.
• They may also not have access to the internet or a smart phone, or even be aware that they need to apply.