LONDON – Trying to force the lucrative euro clearing business — which sees close to $US1 trillion transactions every day — out of London after Brexit could be incredibly dangerous and lead to a “deeply, deeply bad” situation, according to one of the City of London’s most high profile figures.
While it may be politically expedient for the EU to try to force the business out of London, doing so in practice would cause chaos across the continent, Michael Spencer, the chief executive of NEX Group — formerly known as ICAP — said on Wednesday.
“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.”
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 of trades per day, according to a House of Lords report from 2016.
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.
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.
Spencer, however, pointed out that a large amount of euro clearing already takes place across the channel, and the business is not simply taking place in London.
“There is already clearing of euro derivatives in Europe. Eurex, the German stock exchange platform clears euro derivatives. To put this in context, their open exposure on euro derivatives at the moment is fractionally under €1 trillion,” he said.
“Clients can use whichever clearing house they want, there are no restrictions, you have at the moment mutual access, mutual recognition, open access. So clients choose where they want to clear.”
Since Britain voted to leave the EU last summer pressure from political leaders has intensified with regard to shifting clearing out of London, with officials from across the bloc frequently making clear they believe that it must shift to an EU hub like Frankfurt or Paris.
Earlier in April, French Finance Minister Michel Sapin told the Financial Times that it is not possible for the City to continue the lucrative clearing business after Britain leaves the European Union on March 29, 2019 because it would hurt the EU’s “sovereignty.”
“Everyone sees that . . . this goes to the heart of the resilience of our [financial market] arrangements and of our sovereignty over our money,” Sapin said.