A transition deal for clearing in the UK must be decided on as soon as possible, or EU economies and banks will take a hit, a report out today is warning.
The International Regulatory Strategy Group (IRSG), which carried out the study and is a regulatory advisory body for the City of London Corporation and TheCityUK, also argues lack of clarity over the status of the rules governing clearing post-Brexit could lead to higher costs and decreased business growth for firms in the EU member states.
"It is crucial that as part of the Article 50 process an agreement must be reached on transitional arrangements that avoid a cliff edge effect when the UK leaves the EU that risks financial stability and forces firms to hold more capital – a cost that will be borne by their clients," said Mark Hoban, chairman of the IRSG and a former Tory Treasury minister.
"That transitional arrangement must bridge the period between when we leave the EU and agreement being reached on the new relationship between the UK and the EU27 and an implementation period to enable the new arrangements to be put into place."
At present, the UK processes around 40 per cent of all worldwide trade through its clearing houses, while the other EU member states handle not even 10 per cent of the global business.
The IRSG report did not consider what could happen if the UK was not allowed to carry out euro-denominated clearing after Brexit. A number of industry voices have warned the European Central Bank (ECB) could seek to move this industry out of the UK once it is no longer an EU member.
A report from professional services firm EY, which was commissioned by the London Stock Exchange, warned last November 83,000 jobs could be lost if euro clearing was forced out of London post-Brexit. In the same month, London Stock Exchange boss Xavier Rolet cautioned moving euro clearing out of the UK could lead to banks needing to hold $77bn (£62bn) in additional collateral.
Fears the ECB might want to take euro clearing away from the UK are not completely unfounded, as it has launched legal action in the past to insist these activities must be carried out in the eurozone. The UK challenged this, and, in 2015, the EU General Court found in the country's favour.
The UK is currently the largest centre for euro clearing, processing around 75 per cent of transactions which carry an average daily value of over $500bn.