More than 50 trading desks in the EU across eight major banks face supervisory action as the European Central Bank clamps down on “empty shell” operations in the bloc after Brexit.
The European Central Bank said on Thursday the first phase of its ‘desks mapping review’ assessed 264 trading desks at seven banks, and found 56 of them, or 21%, did not meet requirements and “warranted targeted supervisory action”.
The desks mapping review is assessing whether new EU hubs set up by international banks since Brexit have enough senior staff, activity and controls. It wants to ensure they are not empty shells – where EU legal entities may book exposures, but traders, infrastructure and risk management have stayed in London.
The first phase of the review was launched in spring 2020, and Andrea Enria, chair of the ECB’s supervisory board, gave some details of its findings in a blogpost on Thursday.
"Empty shell structures ... are a very real concern," Enria said. “For the desks identified as material, we will issue individual binding decisions to the incoming banks.”
The ECB also required an eighth bank to address its booking models in 2020, before the desks mapping review.
The eight banks under the ECB’s scrutiny are US banks JP Morgan, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley, and European rivals Barclays, HSBC and UBS.
The central bank could require firms to appoint a head of desk with more clearly defined reporting lines and pay structure linked to the performance of the desk, or require more people or more senior staff on the local trading desk.
Other requirements could include improving infrastructure or governance to manage risk locally, or limit reliance on intragroup hedging.
Enria said banks could have to change their structures, but it would be proportionate in its requirements. He said some foreign exchange products or complex products, for example, may be more efficiently managed centrally. London is the world’s dominant market for FX trading and many derivatives, so it might make sense to keep business there.
“The ECB is navigating uncharted waters,” Enria said. “No major supervisor has ever had to assume, over a short period of time, the integration of a significant number of incoming institutions with global market activities belonging to groups headquartered in third countries in its supervisory remit.”
The UK left the EU at the start of 2021 and most banks have set up new EU hubs since then. The number of jobs leaving London for the Continent has been modest – accounting firm EY estimated 7,000 people had moved or planned to move. Bankers have said the Covid pandemic meant the ECB did not force big changes or senior staff to move, but that could change in future.
The ECB said 70% of the trading desks in its review still implemented a back-to-back booking model and about 20% were organised as split desks, whereby a duplicate version of the primary trading desk located in London or elsewhere is established in the EU just to manage the part of the risk originated there.
It said the 56 trading desks that required supervisory action represented about 46% of the risk-weighted exposure of the desks reviewed – indicating they included many of the largest desks.
The ECB is not setting targets for business to be relocated to the EU but said it wants to ensure the legal entities have strong governance and risk management. The extent that banks have to relocate staff or assets will vary according to their set-up.
The central bank said it will continue to review banks’ operations. “Investigations into credit risk-shifting techniques, the reliance on parent entities for liquidity and funding, and internal model approvals are still ongoing,” Enria said.