LONDON — Bank of England Governor Mark Carney on Tuesday warned of the dangers of stripping London of its €900 billion a day clearing business, saying that fragmenting the industry is in “no one’s economic interest.”
Speaking in London, Carney argued that forcing the relocation of euro-focused clearing activities away from London “would reduce the benefits of central clearing” as would mandating that any global clearing markets are split by currency or jurisdiction.
“Fragmentation of such global markets by jurisdiction or currency would reduce the benefits of central clearing. EU27 firms account for only a quarter of global activity in cleared euro interest rate swaps, and about 14% of total interest rate swaps in all currencies cleared by LCH,” he told audience of his rescheduled speech at the Mansion House.
“Any development which prevented EU27 firms from continuing to clear trades in the UK would split liquidity between a less liquid onshore market for EU firms and a more liquid offshore market for everyone else.”
Clearing houses such as LCH and 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.
Eurozone officials have long sought to bring the clearing activities currently housed in the UK onto continental Europe, failing in a legal battle in 2015. However, the Brexit vote last summer has brought renewed impetus to these claims, with the argument that euro-based derivatives should be cleared in the European Union, not outside, as would be the case if the business remains in London post-Brexit.
Last week, for instance, the EU proposed new powers for the European Central Bank and market regulators to force them to relocate to Europe if they are deemed to be so important that their collapse would cause the rest of the financial system to fail.
“The continued safety and stability of our financial system remains a key priority. As we face the departure of the largest EU financial centre, we need to make certain adjustments to our rules to ensure that our efforts remain on track,” Valdis Dombrovskis, the EU’s financial services commissioner, said in a statement announcing the bill.
Senior UK officials and those involved with clearing in Britain have strongly defended their position and the country’s role in clearing, saying that it is both efficient and cost effective to allow clearing to remain in the UK.
For example, earlier this year Xavier Rolet, chief executive of the London Stock Exchange warned that moving the business out of London could cost investors up to €100 billion in the long run.
“London clears 18 major currencies and these multi-currency netting efficiencies meant LCH saved its customers $US21 billion in capital last year. Strip out euro clearing and you lose these efficiencies, potentially increasing cumulative trading costs by €100 billion over five years,” he wrote in the Times.
Patrick Young, head of capital markets advisory firm DV Advisors and a former derivatives broker, also defended the practice recently.
“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 in April.
In the same speech, which was postponed last Thursday after the City of London Corporation cancelled the Mansion House dinner out of respect for the victims of the Grenfell Tower disaster, Carney made clear that he does not support an interest rate hike any time soon.
“From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time to begin that adjustment [raising rates].”