London’s deep, liquid markets and the breadth of its financial and professional services mean that it stands unrivalled as a European financial centre, which is one of the reasons why it has dominated the foreign exchange market in such a decisive way.
The City’s traders now sell more than twice as many euros as all the countries of the Eurozone combined, and London’s three main clearing houses handle around €1 trillion of euro trades daily.
Being able to continue euro-clearing operations is an important component of the future health of the City of London, for sure. But it is also vital to the health of the EU itself.
It may sound superficially persuasive to apply territorial restrictions to key market infrastructure operations, ensuring their location firmly within the Eurozone. However denying London the right to clear euros in a discriminatory action would need to be universally applied to other non-EU financial centres and could spark retaliatory measures. This risks undermining the euro as a reserve currency and could place extra costs on market participants at a time when fresh crisis looms for the currency.
All of the EU politicians and financiers I have spoken to understand that this is a risk not worth taking. They express no desire to prevent euro-denominated trades from being cleared in London and indeed privately rail against the notion that such business might be forcibly moved to Paris.
Most sensible players implicitly understand that if London is undermined, key participants in the financial services industry will move not to Frankfurt, Dublin or Paris but to New York, Singapore or Shanghai.
At the very moment when President Trump looks set to unleash Wall Street from Dodd-Frank, the EU knows it cannot afford to be so reckless. A move of this nature would also require treaty change since the ECB currently has no legal powers to prevent global financial institutions from trading and clearing euro-denominated instruments – yet another hurdle to overcome.
To be candid, most of the noise being made on this subject is little more than naked political posturing and domestic electioneering.
This is ultimately unhelpful to both sides in Brexit negotiations.
The majority of our EU counterparts are pragmatic and, like us, seek a deal on financial services which best protects the interests of domestic businesses and their wider economies.
I am confident the status quo will remain.