The EU threat to euro clearing made clear

Business & Economy 13 Jun 2017
The EU threat to euro clearing made clear

Euro clearing made clear: What is it and are City jobs at risk?

Sky's Ian King explains the threat to City jobs as Brussels proposes post-Brexit powers over euro clearing operations.

Image: The City of London handles the vast majority of euro clearing

Ian King

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The EU is seeking new powers to allow it to deny post-Brexit London the right to host some financial market clearing operations that deal in euros.

:: What is clearing?

Clearing is the process in which a promise of payment is turned into an actual payment by moving money from one account to another.

For example, where someone buys a share, clearing involves delivering that share from the seller to the buyer and the money for it from the buyer to the seller.

:: Why is it in the news?

Because the European Commission wants to force parts of some euro-denominated clearing currently done in London to be carried out in the eurozone.

:: What in particular?

Euro-denominated derivatives such as swaps – instruments that are used by businesses to protect them against moves in interest rates or currencies that might hurt them.

:: Warning to Brussels over clearing threat

:: Is this business important to the UK?

London is where nearly three-quarters of euro-denominated derivatives transactions are cleared. It is undoubtedly profitable for the UK although it is hard to put a figure on it and it is a low margin activity.

Just 1,000 people or so work at the London Clearing House. But a report by EY, the professional services firm, concluded last year that the loss of all euro-denominated clearing could result in the loss of 83,000 City jobs, once lawyers, accountants and IT professionals elsewhere are included.

:: Why is so much of this business done in the City?

Lots of reasons. But it's mainly because so many global financial services companies have operations in London and they like using UK law.

:: What's the argument for removing this business from London?

The French have been pushing for this for years and Brexit has given them another excuse. They argue euro-clearing operations should be where euro-system supervision is carried out.

:: Why do they say that?

The London Clearing House, where this business is done, sits – like other clearing houses – between the two counterparties in a trade and has to manage the risk if either side defaults.

Because it is where three-quarters of euro-derivatives trades are cleared, the Commission argues it is 'systemically important', so should be regulated in the eurozone.

:: Is that justified?

Not really. Yen trades, for example, are routinely cleared in London. The Japanese have never insisted they are cleared in Tokyo.

Similarly, Eurex, which is owned by Deutsche Boerse, clears – among other things – transactions involving UK government bonds and shares listed on the Irish Stock Exchange. Britain and Ireland have never insisted such transactions are cleared here or in Dublin.

:: So what's it all about?

A power grab, particularly by the French, who have long envied the City's position as Europe's pre-eminent financial services sector. Brexit is the excuse.

:: Anything else?

Yes. There's a bit of history here too. In 2011, as the eurozone debt crisis took hold, the London Clearing House (which is owned by the London Stock Exchange) raised the cost of doing business in Spanish, Portuguese and Irish government bonds. Some thought this added to the instability.

:: Has a row like this happened before?

Yes. The European Central Bank (ECB) has previously sought to insist that all euro-denominated trades are cleared in the eurozone. Britain challenged this at the European Court of Justice (ECJ) in Luxembourg in 2015 and won.

:: So why can't Britain just go to the ECJ again?

Because the ECJ only ruled against the ECB on the grounds that it was illegal to discriminate against another EU member state. The UK will no longer be able to rely on that protection once it has left the EU.

:: If this goes through, would there be other losers apart from the City?

Yes. Most banks like to do all their euro-derivatives clearing in one place, London, so they can net off their exposures against each other – which saves them billions of dollars annually in the cost of putting up collateral.

If the business goes elsewhere, the cost of doing business goes up, both for the banks and their customers. It would hurt everyone – not just the City.

Posted in:

  • UK economy
  • Brexit

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