London could lose parts of £880m–a–day trade as EU seeks power to make business relocate for financial stability.
Brussels has published proposals that could force London’s prized euro-clearing trade out of the City after Brexit, as the EU plans for life without Europe’s biggest financial centre.
While the plans stop short of forced relocation after Brexit in 2019, they would give the EU greater oversight and the power to compel “systemically important” firms to move to the continent in the name of protecting financial stability.
London is the global centre of euro-clearing, which involves processing transactions worth about €1tn (£880bn) a day, making the market a key part of Britain’s financial services industry.
Euro clearing is essential to the flow of money around the world: clearing houses act as an intermediary between two sides of a trade conducted in euros, such as derivatives contracts designed to shield businesses from sudden shifts in interest rates or currencies.
The head of the London Stock exchange warned last year that 100,000 jobs in the City were at risk if the UK capital lost the ability to process euro-denominated transactions.
The latest proposals from the European commission fall short of a full-frontal assault on London’s euro-clearing business, but City bodies decried the lack of detail about how and when Brussels might pull the trigger.
What is euro-denominated clearing?
Euro-denominated clearing refers to the trade of financial products, such as derivative that are priced in euros. Clearing houses act as the buyer and seller in these trades. They agree to take on the risk of a default, on behalf of the actual buyers and sellers such as investment banks, in exchange for a payment. London clearing houses dominate the euro side of things, dealing on a daily basis with €1tn of foreign exchange contracts (converting an amount of euros into another currency), compared with €400bn in New York.
According to the draft law, if the European Securities and Markets Authority decides that a clearing house outside the EU is handling “systemically” important volumes of euro-denominated trade, a system of tougher supervision would be introduced. Any “systemically important” business deemed to pose a potential risk to financial stability could be required to move to the continent.
Technical experts at ESMA would make a relocation recommendation, with input from the European Central Bank, but the commission would take the final decision.
“The purpose of our legislative proposal is to ensure financial stability and not moving business for the sake of moving business,” Valdis Dombrovskis, the European commission vice-president in charge of financial markets, told reporters.
Brexit meant “certain adjustments to our rules” were needed, he added.
EU officials gave officials a degree of discretion in determining whether the EU’s financial stability is threatened by the trade in Brexit London. In theory, this could give the EU more speed and flexibility to adjust their rules against UK-based firms in future, while also not closing down avenues ahead of the Brexit negotiations.
The draft law has to be agreed by EU finance ministers and the European parliament, a process that will begin against the backdrop of the Brexit negotiations, which must end with the UK’s EU exit on 30 March 2019.
Lobby groups in the City of London said the proposals from Brussels would damage the EU unnecessarily while increasing risk, because clearing could become more fragmented.
“The EU is simply not equipped to handle the volume of clearing that the UK does each day,” said Catherine McGuinness, policy chairman at the City of London Corporation, the local government authority for London’s financial district. She said US authorities were not suggesting dollar clearing should be repatriated from London, although the US trade is even larger, at $2.1tn (£1.6tn) a day.
Miles Celic, the chief executive of TheCityUK, a lobby group, said: “While these proposals appear to fall short of the worst-case scenario, the European commission is holding back any real detail on when or how it might pull the trigger on a location policy.”
He accused the commission of “currency nationalism [that] is likely lead to less competition, higher costs and market fragmentation”.
The British government, which has the right to vote on these proposals while it remains an EU member, is likely to pursue a similar line of attack. The chancellor of the exchequer, Philip Hammond, is likely to tell his EU counterparts that any attempt to damage London’s euro clearing for national advantage would rebound on European firms with higher costs.
A Treasury spokesman said: “The UK’s central counterparties [clearing houses] play a crucial role in supporting economic growth here and across the EU. We are clear that how UK firms access EU markets, and vice versa, is a matter for the forthcoming exit negotiations. In the meantime we stand ready to engage constructively on this legislation, fulfilling our obligations as a member state.”