The battle over euro-denominated clearing is heating up amid apparent attempts to move the business away from London.
An Intercontinental Exchange (ICE) report, circulated this month to EU member states, has warned that forcing the clearing of euro derivatives away from the UK could lead to a “significant increase” in costs for European banks.
The UK is the largest centre for the clearing of euro derivatives globally, handling 75 per cent of transactions at an average daily value of $573.6bn (£458.9bn), “and there is no reason why this should change”, the ICE report said.
“The UK is a world leader for financial services,” Mark Boleat, policy chairman at the City of London Corporation, told City A.M.“Clearing operations are largely based in the City not just because of the expertise of our people but also because of the clustering effect in the Square Mile.
Simply taking this business to the continent is far easier to talk about than actually do in practice.
Clearing needs a critical mass. Fragmenting clearing would damage Europe’s financial markets.
London’s euro clearing dominance has become a key battleground for the financial services industry since the UK voted for Brexit in June.
The Square Mile’s history of clearing European currencies charts back to the 1960s when US authorities approved the Eurodollar market – where non-US holders of dollars could keep them in London and still receive interest on deposits.
It emerged at the end of last week that the European Union is considering legislative measures to move euro clearing into the Eurozone after Britain leaves the bloc.
The ICE report suggested that any “protectionist move could severely damage confidence in the currency within the global economy”.
Within a week of the EU referendum, French President Francois Hollande said London would have to relinquish its euro clearing crown and that “other financial centres in the bloc” should prepare to take on the business.
Britain’s chancellor, Philip Hammond, hit back in September, suggesting that New York – rather than Paris, Frankfurt, Dublin or Amsterdam – would be the most likely beneficiary.
He added: “Anything that split clearing up, or tried to force it relocate, would simply force up the cost of clearing with a huge cost to the European economy as a whole.”
In the UK, there have been several warnings about the impact moving clearing would have on the economy.
Accountancy firm EY has estimated that 83,000 jobs could be list if it is forced away from London and that a “significant domino effect” could raise this figure to 232,000.
Meanwhile, London Stock Exchange Group chief executive Xavier Rolet warned last month that moving clearing could cost banks $77bn in additional collateral, citing research by think tank Clarus.