London’s global investment banks are expecting that France or Germany will succeed the City over the clearing of $570 billion of euro derivatives and have started to make plans to deal with the fallout, according to sources quoted in Bloomberg today.
It is assumed that the City of London will eventually lose the ability to clear euro denominated swaps after the nation formally leaves the European Union. Although this could take several years, employees and operations that are key to the clearing function will be among the first to be re-located to the continent.
The UK government has pledged to protect London’s status as the epicenter of European trading in interest-rate swaps, which accounts for around 39 percent of the global market. However, the banks are said to doubt that this will be the case after French President Francois Hollande and senior German lawmakers said that clearing in the euro belongs in their countries instead.
It is argued that the European Central Bank has no choice but to take clearing away since it is deemed unthinkable to allow huge volumes of activity with the potential to create an issue of financial instability within the euro area to continue outside its control.
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The UK handles 75 percent of euro-denominated derivatives transactions, according to the Bank for International Settlements data on over-the-counter trades. The world’s largest clearinghouse for interest rate swaps, LCH, is based in London and is majority-owned by London Stock Exchange Group.
Any attempt to move euro clearing from London to the continent would take many years to implement, be highly disruptive, and push up costs for companies across the region.
Nonetheless, former Bank of England policy maker Charlie Bean said the loss of the business is a foregone conclusion. “The issue of euro clearing, I wouldn’t say it’s likely that we’ll lose it, I’d say it’s certain.”
Clearinghouses act as firewalls against defaulting derivatives traders by holding collateral and monitoring risks. Around 700 people are directly employed by London’s clearing firms, who also have many counterparts at major banks that are members. Estimates put the number of clearing jobs in London’s financial district at more than 1,000, according to Bloomberg.
Before the vote, Deutsche Bank Chief Executive Officer John Cryan also said he expected a shift in euro business away from London to the nations that share the currency.