What will happen to trading jobs in London when Brexit is finalised in March 2019? Today's contrasting reports on Deutsche Bank's plans offer two very different perspectives on the potential outcome.
On one hand, the Financial Times says it's spoken to "executives" at Deutsche Bank who are proposing to relocate the process of booking Deutsche's trades to Frankfurt, whilst keeping the actual trading process in London. Under this version of events, only a "small number of back office jobs'", will move to Germany. The traders themselves will stay in the UK.
On the other hand, however, Bloomberg says it's spoken to, "people who requested anonymity," and who say that Deutsche is proposing to move, "several hundred traders and as many as 20,000 client accounts," out of London and into Frankfurt in the next 18 months.
Which is true?
Deutsche Bank isn't officially commenting on the issue. Nor are the regulatory lawyers advising banks on the need to move traders out of London (or not) post-Brexit.
Off the record, however, lawyers say traders' likely location remains a source of confusion. As Deutsche Bank's parallel realities show, there are two versions of the future post-March 2019, and they do not correlate.
In the first (FT) version of traders' future, banks will conduct, "“back-to-back trades,” that enable their traders to stay in London. These are trades in which products are sold by an entity in the EU (eg. the Frankfurt office) and the risk is then transferred to the UK via an internal trade between the London and Frankfurt operations of the bank. Fees for the trade are booked in Frankfurt; the trade itself takes place in London. Traders can therefore stay located in the City, although they may also be subject to "dual hatting" whereby they have a dual employment contract with Frankfurt and London.
Lawyers arguing for this version of events say it will come about because of London's preeminence as a trading centre. "The traders are in London. The liquidity and the markets are in London. The buzz is in London," says a partner at one leading law firm. "The whole market is here and it operates on gossip and trust and people knowing who they're dealing with. You can't just move that to Frankfurt," he adds.
What of the claims by German central bankers that trading in London and booking trades in Frankfurt will not be tolerated post-Brexit? "Just sabre rattling," says the lawyer, dismissively. "- The German government trying to create some momentum."
What of the fact that 50% of European (equities) trading is already conducted electronically and that relationships already count for less than they used to? "Computers can be based anywhere," the lawyer admits.
In the second (Bloomberg) version of the future, trading jobs will move out of London because when German regulators say they won't tolerate back to back trades and double hatting, they mean it.
"On a very strict interpretation of the law, it's going to be difficult to have traders in London while you book the trades in another country," says a partner at a rival law firm. "You would effectively be triggering two regulated activities in different countries and it's hard to see how that would function in the absence of today's passporting arrangements," he adds. "Ultimately, I would expect Bloomberg's anticipation of events at Deutsche Bank to be right."
This doesn't mean that London traders should pack their bags though. As with everything relating to Brexit, this partner notes that much remains unclear. Moreover, he says that if the FT's right, Deutsche wouldn't be the only German bank planning to simply book its trades in the EU: "I know of another German bank intending to do this too."
Similarly, he says that unless the EU issues central guidance on the issue of traders' locations and the possibility for back-to-back trades [which it surely will], there's the potential for regulatory arbitrage. For example, the Autorité des marchés financiers (AMF), which regulates banks in France, has allegedly indicated that it will be happy to tolerate back-to-back trades post Brexit, as a means of encouraging banks to relocate to Paris.
Unfortunately, the lawyer says that politics make the whole thing horribly opaque: "I've spoken to a lot of politicians in the last nine months and they all make the point that strict legal analysis doesn't necessary apply in situations like this. If it's politically expedient, the rules will be changed."
For the moment, therefore, Deutsche's traders are like Schrödinger's cat. They're both moving to Frankfurt and not. We'll only know discover the reality as the Brexit box opens over the next 20 months.