Forcing euro clearing out of London after Brexit is not only impractical but actively dangerous

LONDON — As formal Brexit negotiations get closer and tensions between Britain and the EU seemingly intensify daily, much has been said about the removal of London’s role as the hub for the clearing of euro-denominated derivatives and swaps.

Clearing houses 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, eurozone financial bigwigs have consistently argued that euro clearing should take place within the euro area, and Britain has repeatedly had to defend its right to clear trades, given that it does not have the euro. In 2015, the UK won a court battle to continue clearing in London.

Those cries have intensified since last June, with influential politicians from individual EU countries and the European Commission repeatedly calling for clearing operations to be moved to continental Europe.

Things intensified when on Thursday, the
Commission said in a paper that central counterparties may need “enhanced supervision at EU level and/or location requirements.” Location requirements mean that would likely entail shifting to the continent.

However, at a conference attended by Business Insider last week, Patrick Young — head of capital markets advisory firm DV Advisors and a former derivatives broker — put forward the case as to why forcing clearing operations to move out of London would not only be unwise but actively damaging to global market structure.

“Political processes are generally run by politicians, and very few of them spend a great deal of time thinking about central counterparty clearing,” Young said of calls from politicians like Valdis Dombrovskis and French finance minister Michel Sapin to move clearing out of the UK.

“The situation we have is very simply, it cannot work, it will not work [moving clearing out of London],” he told the Prosperity UK Conference at London’s County Hall.

“What we have at moment is a situation where people are saying ‘We’re going to pick up all of this stuff called euro clearing’ as if its some bucket of sand, and take it to Frankfurt and deposit it, and everything will be hunky dory. It won’t be.”

By forcing a wholesale shift of clearing activities, Young argued, clearing houses would lose the ability to serve their clients effectively, noting that it could “very, very significantly endanger clients who need the best execution and the best possible service that they can. That sort of fragmentation is going to be bad for the world, dangerous for the world, and a problem.”

Young’s comments came on the same panel that Michael Spencer, the chief executive of NEX Group — formerly known as ICAP — made a similar argument.

“At a superficial level this may sound sort of reasonable,” Spencer said of claims that euro clearing should be done in the eurozone.

“But actually, once you stand back, the ramifications are really quite alarming. Because the only way they could repatriate euro clearing from the UK into the eurozone is by effectively banning, or making it profoundly difficult for, eurozone institutions to access to euro clearing in London.”

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