London’s grip on its near-€900 billion clearing business is slipping
The City of London struck back at European Union plans to wrestle control of its €885 billion euro clearing business after Brexit.
Catherine McGuinness, head of policy at the City of London Corporation said: “London is the unparalleled leader when it comes to clearing.” “In taking steps to shift power away from UK clearing houses, the EU could damage itself unnecessarily,” she said. “Fragmentation of foreign exchange and interest rate trading across Europe and the rest of the world could lead to firms’ costs increase by as much as 20%.” Clearing houses such as LCH and ICE Clear Europe in London manage credit risk, acting as a middle-man in swaps and derivatives trades to guarantee the contract in the event that one of the parties involved in the trade goes bust. The EU proposed new powers on Tuesday for the European Central Bank and market regulators to force them to relocate to Europe if they are deemed to be so important that their collapse would cause the rest of the financial system to fail.
As London prepares to leave the European single market as part of Brexit, a power struggle over the location of euro clearing has seen tensions rise on both sides of the channel.
The EU has argued that it cannot delegate power over derivatives contracts denominated in its core currency, the euro, to countries based outside of the EU.
“The continued safety and stability of our financial system remains a key priority. As we face the departure of the largest EU financial centre, we need to make certain adjustments to our rules to ensure that our efforts remain on track,” Valdis Dombrovskis, the EU’s financial services commissioner, said in a statement announcing the bill.
Meanwhile, UK financial figures have said centralising the clearing business in London has saved billions and reduced risk. Earlier this year Xavier Rolet, chief executive of the London Stock Exchange warned that moving the business out of London could cost investors up to €100 billion in the long run. “London clears 18 major currencies and these multi-currency netting efficiencies meant LCH saved its customers $21 billion in capital last year. Strip out euro clearing and you lose these efficiencies, potentially increasing cumulative trading costs by €100 billion over five years,” he wrote in the Times.
There is the suspicion that the EU has used financial stability concerns to make a play for one of the jewel’s in London’s crown as a financial centre.
“Each day the UK clears on average $2.1 trillion in dollars – more than the €885 billion euros cleared, yet the US is not suggesting this function is repatriated,” McGuinness said. “The EU is simply not equipped to handle the volume of clearing that the UK does each day.”