LONDON — The CEO of the London Stock Exchange is warning that taking euro clearing away from London post-Brexit could end up costing investors an extra €100 billion (£86 billion, $US111.8 billion) over five years.
Xavier Rolet writes in The Times on Monday that moving euro clearing out of London would “increase, not reduce, levels of systemic risk and increase costs for European companies, diverting capital away from the European economy.”
London has become the hub for clearing euro-denominated trades and swaps since the financial crisis. Clearing houses sit in the middle of trading contracts to guarantee them 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 trading company went bust it would bring the whole system down by setting off a string of defaults.
An estimated €930 billion (£792 billion, $US995 billion)-worth of euro-based trades are cleared through London each day but European leaders have repeatedly signalled that they will force companies to move clearing out of the UK post-Brexit and have it take place within the eurozone.
France’s finance minister Michel Sapin said in April: “Everyone sees that… this goes to the heart of the resilience of our [financial market] arrangements and of our sovereignty over our money.” A recent EU report also floats the idea of mandating that all OTC derivatives are cleared within the eurozone and Deutsche Bank has reportedly been asked by regulators prepare a backup plan in case clearing leaves London.
Rolet, whose London Stock Exchange Group owns a majority stake in the London Clearing House (LCH), writes in the Times:
“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.
“If Europe insists on trying to implement an artificial, inefficient location policy, it will only hurt the European capital markets and real economy.”
Rolet argues that any location-based policy for clearing would “fragment global markets.”
Micheal Cole-Fontayn, the chairman of BNY Mellon in Europe and the chair of the Association for Financial Markets in Europe (AFME), told Business Insider in a recent interview that the LCH has “been incredibly successful at generating a very effective and efficient network. It creates enormous efficiencies in terms of operational resiliency and risk management opportunities in cross-currency asset netting positions.”
Cole-Fontayn echoed Rolet’s warning on relocation, telling BI: “Brexit has the potential to result in a more fragmented world with less than optimal coordination, communication, and operational efficiency.
“For this reason, financial institutions need to be very clear as to what their strategies and their business models are, and how they intend to execute these.”
Michael Spencer, the founder of financial technology company NEX Group (formerly ICAP) and a prominent Conservative Party donor, has also attacked relocation proposals. He told the Telegraph earlier this month that re-locating clearing post-Brexit would be “a pretty extraordinary and retrograde and really nationalistic movement.”
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