The trading volume is enormous, as derivatives with a nominal value of €930 billion ($1.02 trillion) change hands daily. Up to 230,000 people are directly and indirectly employed by the business, working at exchanges, banks and various financial service providers. They all deal in transactions made in euros. For the City of London, the business is as important as it is profitable.
But now Brexit poses an acute threat. When the United Kingdom leaves the European Union on March 29, 2019, as foreseen under current plans, it will also exit the jurisdiction of Europe’s financial supervision. And the European Union is unwilling to accept the fact that three quarters of the derivatives trading denominated in euros should remain in London.
This is why the European Commission has long considered moving at least a portion of the so-called euro clearing system to the continent. Valdis Dombrovskis, the Latvian vice president of the Brussels-based commission, will take action for the first time this Thursday. He intends to provide London clearinghouses with a clear choice: Either they move the clearing for their euro derivatives trading to the EU, or they agree to be supervised by European authorities after Brexit.
The second option would probably not pose a challenge for the companies themselves, but it would present the British government with a problem. It seems unlikely that London will continue to allow EU regulators into the country after the Brexit. Prime Minister Theresa May wants to distance herself from the European Union as much as possible. She wants the United Kingdom to leave the European single market and its tariffs union. Decisions by the European Court of Justice should equally no longer have a bearing on Great Britain once the departure is completed. In taking this position, Ms. May is also abandoning EU financial market regulation.
This is why the vice president of the European Commission, himself in charge of financial markets, is already making arrangements now for the period after Brexit – for example, by issuing a new EU directive that regulates derivatives trading.
"A short-term suspension of the clearing requirement is possible to avert a serious threat to the financial stability of the Union," the amendment, seen by Handelsblatt, says. The revision will enable the Commission to incapacitate a clearinghouse by decree far more quickly and easily than it can today.
Now that the Brexit has officially been declared, we can no longer make allowances for the City of London. Manfred Weber, leader of the European Peoples' Party (EPP) in the European Parliament
The new provision had been in the planning even before the Brexit vote last year to allow quick control of clearing companies in the event of a problem. But the amendment also bears great significance for Britain, especially in combination with the reference to threats to the "financial stability of the Union." The European Commission has repeatedly used this wording to address risks surrounding the British withdrawal from the European Union.
"Now that the Brexit has officially been declared, we can no longer make allowances for the City of London," said Manfred Weber, parliamentary leader of the conservative European Peoples' Party (EPP) in the European Parliament. "Euro clearing cannot take place outside the EU." To address this concern, Mr. Dombrovskis on Thursday plans to announce the centralization of the supervision of large clearinghouses. Providers in non-member countries could either be subject to requirements relating to their location or direct supervision by EU agencies.
In taking this step, the European Union is dealing the Brits yet another serious blow. Depending on the estimate, up to 232,000 jobs in Great Britain are dependent on euro clearing. Xavier Rolet, head of the London Stock Exchange (LSE), brought these numbers into play, most recently in a hearing before members of the European Parliament at the beginning of the year. They are based on a study completed by consulting firm EY last year on behalf of the LSE.
The study's authors assume that 83,000 jobs in London could be affected over the next seven years if the clearing of euro securities transactions is moved to the continent. It is not just a question of jobs with clearing companies like LCH Clearnet, which is majority-owned by the LSE. The step would also affect jobs in the banking sector, especially in the trading business and with brokerage firms. Thousands of jobs with technology providers, in asset management and with financial service providers could also disappear. According to EY, this could have a domino effect and involve financial companies and their service providers throughout Britain. The job losses would then increase to more than 200,000 throughout the country.
Other experts see even more risks associated with a forced move of euro clearing from London to the euro zone. The step could also increase the costs of clearing transactions and lead to a fragmentation of capital markets, warned Jon Cunliffe, deputy governor of the Bank of England, in a speech in late February. Advocating for Britain’s clearinghouses he remarked that it was not necessary for transactions to be cleared in the jurisdiction of the currency in which they are denominated, as such transactions posed no threats to either the financial markets, nor to the currency itself.
Ruth Berschens heads Handelsblatt's Brussels office, leading coverage of European policy. Katharina Slodczyk is Handelsblatt's London correspondent. To contact the authors: [email protected] , [email protected]