LONDON (Reuters) - Government debt agencies in a number of European Union countries have started switching contracts from the London divisions of banks to those on the continent as they prepare for Brexit with a process some describe as painful and tricky.
Officials from the agencies of five countries told Reuters they are in the process of changing their list of “primary dealers” — banks appointed by governments to help manage their borrowing — from London entities to those based in the 27 states that will remain in the EU when Britain leaves in March.
However, the changes are being complicated by the fact that each bank is adopting a different approach to the problem.
As much as 70 percent of European government bond issuance is currently believed to go through Britain, with the main UK banks, international lenders, and even some European ones all serving continental clients through their London offices.
For example, countries such as Italy, Spain and France list UK-incorporated Barclays Bank plc, JP Morgan Securities plc and Nomura plc as primary dealers.
Even some European banks — Deutsche Bank, for example — offer these services through their London branches.
But the possibility of a “no-deal Brexit” is looming large, meaning UK operations risk losing their “passporting” rights under which financial services firms based in one EU member state can serve clients in the rest of the bloc.
Most banking, insurance and other financial firms in Britain would be cut off from the EU if the United Kingdom leaves without sealing a Brexit deal, the EU’s executive body said on Wednesday.
EU debt agency officials have lost no time in making alternate arrangements and not only for sovereign bond issuance, which totals about 150 billion euros a year, according to Refinitiv data. They are also making changes for handling other business including secondary market trading, such as in interest rate and currency swaps.
Foreseeing this, British-based banks have been setting up European divisions since Britons voted for Brexit in June 2016, and now the process of transferring the business to those centers has begun.
Hurdles are already emerging as banks start reworking contracts with multiple borrowers at the same time.
“You have a lot of countries doing it at the same time. The pain is made a bit bigger because the banks choose different ways of handling Brexit,” said Thorsten Meyer Larson, head of investor relations and risk, government debt management at the Danish central bank.
“I would prefer strongly we had one solution, but that’s not possible. I understand why they have different ways, but it means we have to bear part of the burden of adapting.”
For example some banks are moving all transactions — such as interest rate swap arrangements — from London to their European entities, he said. However, others are keeping existing deals under the old entity and executing new trades under the new entity.
One senior banking official working for a major London-based institution said every bank has a different approach for historical reasons.
“HSBC will rely on the French bank (Credit Commercial de France) which they bought in early 2000s, they will approach things differently. U.S. banks rely on the broker-dealer model and the continental banks already operate in Europe,” he said, asking to remain unnamed as he is not authorized to comment on the matter publicly.
The contractual rewriting process involved the exchange of documents, reviews, legal input where needed, redrafting of terms of business, contracts and migration of positions.
“The official line is that it has been relatively easy and straightforward but behind the scenes no one would echo those comments,” he said.
One of the euro zone officials said that in addition to the passporting issue, they also had to make sure they had legal recourse to any funds raised by banks on their behalf. “It is at the moment unclear if that will be the case after Brexit, so the advice from our legal team was to be prepared for any outcome,” she said.
The legal issue takes on a different dimension for countries outside the euro zone which issue debt regularly in the single currency.
“Such a vast amount of bonds are issued under English law,” said Gyorgy Barcza, chief executive officer at the AKK, the debt management office for Hungary. “Maybe for the future, euro issuance will have to be changed, but that could be very challenging. What kind of law that could be? German? (I’m) not sure the market is fully prepared for that.”
However, Barcza said Hungary mainly issues bonds directly in local markets, so it can wait for “the dust to settle”.
Reporting by Abhinav Ramnarayan, Additional reporting by Virginia Furness; editing by David Stamp