THE KNIVES ARE SHARPENED.
As the UK political parties swing into campaign mode, the Europeans are focusing intently on wresting every European institution and activity back to their continental shores. This is particularly the case with euro denominated clearing which has been a hotly debated topic long before Britain decided to leave the European Union.
In fact, even when the business was a shadow of its current self, the Brussels cabal in the 1990s were annoyed that the service was based in London. Fast forward to 2015 and the European Central Bank tried to move it to the eurozone but failed when the European Court of Justice ruled that London could retain one of its most prized possessions.
The City which processes up to three-quarters of global euro-denominated derivatives, clearing a notional €850bn a day, is unlikely to be that lucky next time. The European Commission is seizing the Brexit opportunity and not wasting any time drawing its battle lines before anyone sits at a negotiating table.
Although the finer details have not been divulged it is thought that the Commission is gearing up to propose in June that UK operators of clearing houses have to either relocate to mainland Europe or to be directly regulated by European authorities. The argument is that these central counterparties may pose a significant systemic risk to the broader financial system and EU regulators need to be able to monitor and intervene to prevent any shocks to the systems.
There are reports that officials are considering a system of thresholds to determine if a non-EU clearing house should face increased European supervision or other measures. This could allow current EU-US agreements to remain unscathed, if transatlantic activity does not change significantly. More worryingly, it is also contemplating whether to set conditions that would automatically require LCH, the largest London-based clearing house, to relocate operations if it wants to handle the same level of euro-denominated trading.
The British, of course, are standing their ground and claim that moving clearing is not practical and will only benefit New York as a financial centre. The stakes are high; if the business is forced to move this could translate into the loss of up to 83,000 job losses over the next seven years, according to a recent study by EY.
However, the UK cannot have it both ways and if a deal can’t be reached, they may have to accept EU regulation which would go against the grain of wanting to extricate the country from the red tape of EU legislation.
This debate will be one of the most contentious issues of the Brexit talks and while it is difficult to predict the outcome, recent events have shown that we are in for a long, protracted, back biting and often nasty, two or more years of negotiations. Let’s hope it is more civil behind the scenes.
Lynn Strongin Dodds
Managing Editor, Best Execution