It is easy to see Brexit as a two-way clash between the UK and European Union.
But when it comes to Europe’s financial system, and where its centre of gravity will reside, the United States has a decisive role to play.
I suspect that in most respects the current US administration sees Brexit as a local dispute concerned with things like migration and tariffs, and I doubt they care too much what taxes we slap on each other’s cars or vegetables.
But when it comes to finance, the UK’s role is not a local matter – the activities taking place here represent the beating heart of the global financial system, and specifically the $544 trillion interest rate clearing market.
Though their stance appears to be softening, members of the European Commission would like to have the option to regulate and relocate the portion of that market cleared in euros to within the EU.
That is a problem for everyone, including the US, because it would fragment the market which could both destabilise global finance and also increase costs for all operators. It would also mean major US banks would face the same EU-imposed limits as their British counterparts.
The US has a clear interest in preserving the status quo, and it also has the soft power to protect that interest. That comes primarily from the status of the US dollar.
The majority of international derivative contracts continue to be priced in dollars, and around four fifths of FX transactions have a dollar leg. London is important in that picture because that’s where 90 per cent of the rates markets are cleared.
The US already has a historical agreement with the UK and the EU that established today’s dual supervisory framework, and it has little to gain by tearing up something it spent years helping to put together.
From a purely commercial perspective, there’s nothing to gain for the European economy in relocating euro trades to the EU. Less liquidity and higher margining means derivative trades would become more costly – costs that corporates and consumers would ultimately bear.
Of course, Brexit will challenge the UK’s position in global finance, but not to the extent that many fear.
Financial institutions we speak to remain committed to the UK with its deep, liquid and efficient capital and financial markets infrastructure. The unique confluence of its language, law and longitude means the UK continues to be an ideal offshore location to manage risk.
The EU has already begun stepping back from its earlier insistence on euro clearing, and thanks to US soft power the UK may hold a stronger hand than many realise.