LONDON — The Bank of England gave a robust defence of London’s euro clearing business, saying it offered lower costs and greater financial stability over plans to move it to continental Europe after Brexit.
John Cunliffe, deputy governor of the Bank of England, said “currency nationalism” would prevent the clearing of a single pool of products denominated in different currencies, including euros, and lead to a less efficient system.
The ability to clear multiple currencies in one place “reduces the costs of central clearing — costs that are ultimately borne by the real economy — as well as allowing a more efficient and effective management of the risks that brings significant global financial stability benefits,” Cunliffe said in a speech in London on Wednesday.
“Requiring each of these instruments to be cleared in the jurisdiction of the currency in which they are denominated would simply render multi-currency central-clearing impossible.”
Clearing houses such as LCH 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 acceptance of English law and widespread use of English language has made London a hub for clearing globally, and it handles more than 70% of the daily euro clearing business, equivalent to around €930 billion (£792 billion, $US995 billion) of trades per day, according to a House of Lords report.
However, European policymakers have argued that euro clearing should take place within the euro area. Britain has repeatedly had to defend its right to clear euro trades, given that it does not have the euro.
In 2015, the UK won a court battle to continue clearing in London. France has repeatedly signalled that it wants to steal the business from London. President Francois Hollande said Britain could not retain its key clearing role shortly after the June 23 referendum. Paris, London’s nearest rival for clearing, handles 11% of all euro trades.
Cunliffe said “currency nationalism is not a necessary condition for either financial or monetary stability, as is demonstrated by international experience over recent decades.”
The House of Lords Brexit select committee report on financial services published last year noted that Britain may be unable to mount a legal challenge to any rule change if it has already begun the process of leaving the EU.
The report said: “It thus appears that the legislative changes necessary to bring about repatriation of euro clearing could take place without recourse to treaty change. The UK, as a non-EU Member State post-Brexit, would not be able to challenge its lawfulness before the General Court.”