The government’s Brexit complacency threatens all financial clearing in the UK

Stewart Hosie
Philip Hammond
The chancellor recently played down the importance of euro-denominated clearing (Source: Getty)

Let's be very blunt. The UK government’s failure to have any kind of Brexit plan is potentially catastrophic for business throughout the UK and for the financial services sector in particular.

The UK government’s insistence that it will not offer “a running commentary” on negotiation preparations also means there will be little or no public debate or sharing of information in those areas where it really needs to put up a fight.

This is not a show of strength by the UK government. It is an indication that it has no negotiating position and is terrified of facing up to the consequences of its Brexit policy.

It is also incredibly worrying for industry sectors throughout the UK.

Financial services in general and financial clearing specifically risk a colossal hit as a result of this complacency.

This was made perfectly clear by the chancellor at Treasury questions last month. In reply to a question about the impact on jobs related to euro-denominated clearing from Stephen Timms, MP for East Ham, Philip Hammond said: “in terms of jobs and value… it is a relatively small part of the total.”

But this is to miss the point entirely.

Read more: We need a transitional deal to avoid a cliff-edge of Brexit uncertainty

In 2015, the Stock Exchange SwapClear system cleared $533 trillion (yes trillion) of OTC derivatives, “compressing” $328 trillion and saving businesses $25bn of regulatory capital. The figures for 2016 are likely to be higher and the whole market infrastructure supports around 100,000 jobs.

So although euro-denominated clearing is relatively small, unpicking that threatens the whole operation.

As the Stock Exchange says, “attempting to separate out euro clearing from the clearing of securities in 16 other currencies would lead to a fragmented market causing significant cost, reduced liquidity, reduced netting and increased systemic risk.”

And more importantly, “attempts to separate out specific currencies, euros in this case, will result in all products moving to a place outside the UK.”

The key here is “all” products.

The complacent answer from the chancellor overlooks the risk that losing euro-denominated clearing threatens all clearing in the UK.

Read more: There's no room for complacency about the value of the City's passports

So the government should swallow its pride, engage fully across the UK with businesses of all types, have public and parliamentary debates about the negotiating position so that it – and the public – are left in no doubt about what is at stake if it gets Brexit wrong.

Over the past few weeks, I, and other SNP colleagues, have met with financial sector companies of all sorts.

Their common theme is that the UK government’s lack of a plan, for passporting, for adequate transitional arrangements and more, is hugely damaging.

Businesses tell us that the time it will take to design and deploy contingency plans to mitigate the worst excesses of a (seemingly now unavoidable) hard Brexit is such that, without certainty quickly from the government, all or some of their operations could be lost to the UK.

Any loss of jobs that results from this – in clearing or elsewhere – will be the direct consequence of this government’s dithering approach.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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