Clearing may be early test for London

Britains Chancellor of the Exchequer George Osborne speaks at a news conference in central London, Britain June 27, 2016. REUTERS/Richard Pohle/Pool

LONDON: A battle George Osborne (pic) won last year against the European Central Bank (ECB) may have to be re-fought, showing one of the many ways UK leaders could be forced to defend London’s position as a leading financial centre.

In a rare British victory at the European Union’s (EU) general court, judges in March 2015 sided with Chancellor of the Exchequer Osborne by saying the central bank can’t dictate where euro-denominated trades are cleared.

Osborne’s tussle with the ECB stands out because it’s turf that the eurozone had clearly coveted before, and could now be up for grabs. Much of Europe’s clearing happens in the city of London, and the decision was hailed at the time as reinforcing London’s status as Europe’s financial hub.

A UK lawmaker said after last year’s ruling that Osborne’s win wouldn’t have been possible were the country outside the EU.

Now, Britons’ decision to leave the EU provides scope to reverse that call.

British European Commissioner Jonathan Hill, who after the Brexit vote stepped down from his role, has said that clearinghouses were already eyeing other jurisdictions.

“It’s a battle that’s been going on for a very long time,” said Sharon Bowles, a former member of European Parliament and a non-executive director at London Stock Exchange Group Plc.

If the eurozone clawed back clearing, London could lose ancillary jobs related to collateral management as well as traders who want to be closer to the clearing firms, she said. Brexit has already put thousands of jobs at London’s largest financial institutions at risk.

“The whole thing takes a chunk with it,” she said.

Clearinghouses were embraced by regulators after the 2008 financial crisis, when the collapse of Lehman Brothers Holdings Inc threatened to bring down other institutions. Clearing firms stand between buyers and sellers, holding collateral from both, in case a member defaults. Big trading companies are increasingly required to use them.

Gunnar Hoekmark, a leading European Parliament lawmaker on banking policy, said in a e-mail after the referendum that while it’s up to the markets where clearing takes place, being outside the EU will be a “huge disadvantage” for UK financial firms.

The US$384 trillion of buying and selling in interest-rate swaps is now the world’s largest derivatives market. In euros, about 70% of trading in that kind of swap takes place in the UK, compared with 11% in France and about 7% in Germany, according to Bank for International Settlements data in 2013. The United States cleared 2%.

LCH, majority-owned by LSE, and Atlanta-based Intercontinental Exchange Inc’s ICE Clear Europe are two of the biggest clearing firms in London. LCH has a clearing unit in France, while ICE has operations in the Netherlands.

Clearing is a lucrative business – LCH had income of £360.7mil (US$483mil) in 2015. Its interest-rate swaps clearing unit cleared US$521.4 trillion of trades, according to a Companies House filing. It also clears for Euronext NV, which operates markets in Paris and Amsterdam. Osborne’s boss, Prime Minister David Cameron, resigned last week after the referendum results were announced. The chancellor said he set out his own plans in coming days. – Bloomberg

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