Dragging euro clearing out of London after Brexit could pose a risk to global financial stability and push up transaction costs, according to a deputy governor of the Bank of England (BoE).
Sir Jon Cunliffe, who supervises financial stability for the Bank, hit out at “currency nationalism” as policymakers wrangle over the fate of euro clearing when the UK leaves the EU.
Cunliffe said: “A policy of ‘currency nationalism’ is not a necessary condition for either financial or indeed monetary stability.”
He added: “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.”
The European Central Bank (ECB) has long been keen for euro clearing, in which transactions are made via an intermediary to make them smoother, to be moved to the Eurozone.
The ECB lost a court challenge to previous efforts to require the movement of clearing, but after the UK leaves the EU the European Parliament would be free to change the law without fear of a British veto.
The bulk of euro clearing currently takes place in the UK’s three major clearing houses, with around €1 trillion (£845bn) of euro trades every day, according to European think tank Bruegel. 83,000 City jobs could be lost if the move takes place, according to a report by EY.
Euro clearing has become even more politicised since the UK’s June vote to leave the EU. After the vote French President Francois Hollande said the loss of clearing would serve as a “lesson” for the UK.
The increasingly political rhetoric around clearing was “surprising”, Cunliffe said, as the multi-currency capability of firms such as London-based LCH “reduces the costs of central clearing – costs that are ultimately borne by the real economy.”
This analysis was borne out by a report by Intercontinental Exchange (ICE) which pointed to a “significant increase” in costs for European banks if Brussels gets its way.
Ratings agency S&P also reported a move of clearing to the Eurozone would be "unparalleled among major global markets."
However, others, including the vice chairman of BlackRock, Philipp Hildebrand, say the UK will lose its clearing crown.