By John Hintze and Ted Howard

European Commission approves negotiating principles and orderly approach to Brexit.

With less than two years left before the UK becomes a “thirdcountry,” the European Commission (EC) approved a mandatein early May that sets out core negotiating principles. Key issuesimpacting multinational corporations (MNCs), such as passportingand the status of European Union (EU) and UK citizensworking in the other jurisdiction, have yet to be decided, butthe directives set out in the mandate suggest the EU will try tomake the transition as smooth as possible.

“Businesses will need to adapt to the changing politicallandscape and flex their plans,” said Tim Wright, leader of PillsburyWinthrop Shaw Pittman’s global sourcing team, in a recentnote to clients. “They will, however, take some comfort that theEU appears to be open to a phased and orderly approach towithdrawal, seeking to avoid abrupt disruption and change…”Mr. Wright noted further that the transparent process laidout by the EU means that although the discussions will takeplace behind closed doors, there will be regular updates onprogress to the EU’s institutions and the wider public.

As a third country, the UK and its overseas territories will nolonger be subject to EU laws, although EU law that has alreadybeen incorporated into UK law will be unaffected. In addition,free trade “passports,” which allow companies located in the UKto provide services anywhere in the EU from a single countrymay disappear. This will especially impact global banks, manyof which have established large offices in London that in partservice the rest of Europe, and indeed there are numerousreports of financial institutions moving at least some jobs fromthe UK to new or growing offices in the EU. Bloomberg reportedin March that global banks favor Dublin and Frankfurt aslocations to expand or build new offices.

MNCs that have established offices in London, in part toallow treasury staff to be in proximity to the financial firms theybank with, may want to rethink that strategy. In addition, thepassport issue applies to nonfinancial companies using the UKto provide services to the rest of Europe. Should passportingdisappear, those companies may have to expand or build newoperations in the EU to support customers there.

The EC envisages a two-phased approach to negotiations,the first of which will aim to provide clarity and legal certaintyto citizens, businesses and other stakeholders, likely addressingissues such as passports. Mr. Wright noted that the secondphase is less well-defined but may include transitional arrangementsthat will act as a bridge toward the future relationshipbetween the EU and UK rather than the “cliff edge” approachthat many have feared, often referred to as a “hard” Brexit.

While a phased-in and orderly approach by the EU iscertainly preferable, it won’t necessarily work in the UK’s favorfor issues such as passports.

“With regular media reports of banks and insurers eying upEuropean destinations for new operations or shifting roles toramp up existing European locations, a quick deal to preservemarket access via passporting or equivalency is looking lessand less likely,” the report says.

Mr. Wright took note of the experienced negotiating teamthe EU has assembled and the groundwork it has alreadycompleted. “The EU has assembled a formidable negotiationteam and has mustered key stakeholders across the EU27 so asto present itself as a unified block, shutting out the UK’s abilityto pick off individual countries through back channels in orderto kick start discussions about a future trade agreement,”Mr. Wright said.

CLEARING NOT IN THE CLEAR

That experience may translate into tough negotiations, asEurope appears to be scrambling for moving euro clearing, amultibillion dollar business, back to Europe from London.

Currently the EU’s Executive Commission is readying a draftlaw on euro clearing with France at the forefront of eurozonecountries angling for a piece, if not all, of the lucrative businessafter Britain leaves the bloc in 2019.

But not so fast, says Catherine McGuinness, the newlyappointed head of policy for the City of London financialdistrict. She says it’s a complicated business and not given tosuddenly uprooting to another locale.

“[T]he mass uprooting and offshoring of part of the industry—of clearing of transactions in one currency—would notonly be vastly complicated, but also vastly damaging andpotentially destabilising,” Ms. McGuinness told a conference ofthe Futures Industry Association in London.

And the top US securities regulator agrees, recently warningEurope that it should carefully consider an attempt to move theeuro-clearing industry away from London post-Brexit. CommodityFutures Trading Commission Acting Chair ChristopherGiancarlo said any changes would have a measurable impacton the US derivatives market, noting that a move could bringupheaval to robust and orderly global derivative markets.