All Clear for Euro Clearing?
EU bureaucracy was cited by many as a key driver of the Brexit vote. It is ironic then that, following the ‘Leave’ vote, the complexity of the EU machine is perhaps all that shields the City of London from the loss of its Euro denominated clearing business, worth an estimated €600bn – €1tn per year. This is fortunate as the withdrawal of the business to the continent, as called for by many European leaders (including French President François Hollande), would strike yet another blow at domestic markets struggling to stabilise following the historic referendum.
In a recent interview with the Financial Times, Xavier Rolet, Chief Executive of the London Stock Exchange Group (LSE), noted that moving the business, “would require an [EU] treaty change. An EU treaty change is not an easy thing.” He added that whilst a treaty change, “is not impossible…, for the moment, there is no immediate threat from that standpoint.”
However, as prominent Europhiles (representatives of the European Central Bank among them) continue to call for the repatriation of Euro denominated clearing into the Eurozone, complacency is not advised. If post-Brexit Britain is to keep this lucrative business it will need to ensure that it remains attractive in an increasingly competitive and perhaps hostile marketplace.
For now, banks should remain vigilant. Whilst there is no immediate threat, a change in the locality of Euro denominated clearing could have a significant impact on the operating models of banks, perhaps triggering the need for an assessment of clearing models per product. Clearing houses would also be impacted as banks would need to re-evaluate the suitability of existing memberships and may favour the offerings of other providers should their models change.