High-profile regulators, politicians and financial experts have warned that any move by the European Union to force euro clearing out of London could have grave consequences for global economic stability.
Sir Jon Cunliffe, the deputy governor of the Bank of England who supervises financial stability, hit out at “currency nationalism” on Wednesday, saying: “Such a policy if applied by all jurisdictions is in the end likely to be a road to the splintering of this global infrastructure – and to further fragmentation of the global capital market – rather than the route to the sound and efficient management of risk.”
He also said a forced move out of London could push up transaction costs for clearing house customers.
He was speaking at a time when euro-denominated clearing has emerged as a potential battleground in Brexit negotiations.
The European Central Bank (ECB) has previously attempted to force euro-clearing activity from London and into the Eurozone. Despite losing a landmark case in 2015, its argument was reignited by last summer’s vote.
However, Cunliffe’s warning was echoed by a number of high-profile figures and organisations yesterday.
Writing in City A.M., City of London MP Mark Field said any attempt to force euro clearing from the UK would “risk undermining the euro” and damaging the countries within the Eurozone.
“Being able to continue euro-clearing operations is an important component of the future health of the City of London, for sure,” he said. “But it is also vital to the health of the EU itself.”
Andrew Tyrie MP, chairman of the Treasury Committee, told City A.M.: “Attempts to force euro contracts to be cleared in the Euro area would be at best futile, and at worst an act of needless self-harm.
The EU already allows euro clearing in the United States, thanks to an equivalence decision. If the EU singles out the UK, post-Brexit, by refusing it similar arrangements, business could shift to New York. If it withdraws existing equivalence decisions for clearing and establishes a “fortress Euro”, the benefits of multi-currency netting and compression would be lost, at a cost both to the real economy, and to financial stability.
A Treasury spokesman said: “Any attempt to force clearing to be done in a place that is sub-optimal would have a cost and that cost would ultimately be borne by consumers.”
Miles Celic, chief executive of TheCityUK, said euro clearing is dominated by the City for a reason. “London has the scale, expertise and infrastructure to keep costs as low as possible,” he said.
“It is unclear how the EU could legally prevent this business continuing in London without also stopping it in New York and in Asia. It is hard to see the economic benefits of this approach to either the European economy or global stability given that it would increase costs and weaken the euro's role as a global currency.”
Syed Kamall, a Conservative MEP for London, told City A.M.: “In my mind, there is no doubt that there will be another attempt to shift euro clearing into the Eurozone once the UK leaves the EU.”
He added: “But I also agree with the fact that the EU should not be cutting off its nose to spite its face… Many people I’ve spoken to in the EU and outside of the EU have said to me that they are worried that this will lead to increased transaction costs in the long-run.”
Craig Pirrong, a finance professor at the University of Houston and clearing expert, told City A.M. he agreed with Cunliffe’s comments.
He said: “The fragmentation of clearing that would result from a forced repatriation of euro-denominated derivatives clearing from London to the Eurozone would increase systemic risk, and also increase substantially the cost of clearing.”
Anthony Belchambers, a director of the Financial Services Negotiation Forum, said the EU was at risk of reviving “fortress Europe” accusations, adding: “It’s in the broader interest of the EU to allow clearing to take place outside of the Eurozone.”
A City of London Corporation spokesman said: “The priority should be that clearing houses can continue to function without posing risks to financial stability and for activity to take place where it can do so most efficiently for the benefit of end-users.”
What is clearing?
Clearing is the process through which financial transactions are settled, between the pledge of a payment and the payment itself.
Why is euro-denominated clearing important to London?
Euro clearing, which covers euro-based transactions, is big business for London and its clearing houses, which dominate an estimated 70 per cent of the market. EY research for the London Stock Exchange has estimated up to 83,000 City jobs could be at risk if it is dragged out of London.
Why is London’s clearing crown at risk?
The European Central Bank (ECB) failed in 2015 in an attempt to require big clearing houses to leave London for the Eurozone. The EU General Court ruled against the ECB after a three-year battle. However, the UK’s Brexit vote last summer immediately reignited the issue, with politicians including French President Francois Hollande calling for it to be moved on to the bloc.