Frankfurt says London is 'neither constructive nor prudent' on euro clearing relocation costs

Thomas Lohnes / Getty ImagesPeople sit at restaurant roof terrace with the skyline and finance district of Frankfurt’s financial district, which locals call ‘Mainhattan.’
  • Frankfurt financial lobbyists call claims that forcing clearing out of London would cost investors €100 billion is “unrealistic.”
  • Hubertus Vaeth, managing director of Frankfurt am Main Finance, says: “Exaggerated estimates stemming from London are neither constructive nor prudent.”
  • Report by the Centre for Financial Studies suggests that the actual cost could be as little as €3.2 billion.
  • The location of clearing business has been a major topic of debate since the Brexit vote.

LONDON – Germany’s financial industry is disputing claims made by senior figures in the City of London that forcing euro clearing to move out of London after Brexit could cost investors €100 billion (£88.4 billion/$US118.6 billion) over five years.

In May this year, Xavier Rolet – the now-former CEO of the London Stock Exchange – said in an article for The Times that moving clearing out of the UK would “increase, not reduce, levels of systemic risk and increase costs for European companies, diverting capital away from the European economy,” before citing the €100 billion figure.

Major figures in Frankfurt, Germany’s financial centre, are now disputing those claims, citing numerous studies which suggest that the actual cost could be as little as €3.2 billion (£2.8 billion/$US3.8 billion).

“In the context of the upcoming Brexit, a relocation of the clearing of euro-OTC derivatives for EU-based firms is the subject of controversial discussion,” a report by an academic named Volker Brühl at German think-tank the Centre for Financial Studies says. “The opponents of a relocation argue that a relocation would cause additional costs for market participants of up to USD 100 bn over a period of 5 years.

“This cost estimate is fairly unrealistic and that relocation costs would amount to approximately USD 0.6 bn p.a., which translates to cumulative costs of around USD 3.2 bn for a transition period of 5 years.”

Hubertus Vaeth, the managing director of finance industry group Frankfurt am Main Finance, said in a statement on Tuesday: “The primary goal of any discussion on Euro Clearing must be protecting stability in European financial markets. The exaggerated estimates stemming from London are neither constructive nor prudent.”

Clearinghouses sit in the middle of trading contracts and provide guarantees in case one party goes bust. The system is meant to stop a domino effect causing another financial crisis, with fears that if one major company went bust it would bring the whole system down by setting off a string of defaults.

London has become the hub for clearing euro-denominated trades and swaps since the financial crisis. An estimated €930 billion (£792 billion, $US995 billion) worth of euro-based trades are cleared through London each day.

The location of euro-denominated trade clearing has been a hot topic since the euro first entered circulation in the late 1990s. 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. Years of disputes culminated in a legal battle in 2015, which the UK ultimately won.

However, Brexit has provided fresh impetus for those seeking to move clearing out of London. The ECB proposed a change to its statutes that would give it “a clear legal competence in the area of central clearing,” back in June.

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