Is the City of London about to Lose its Crown Jewel? 

Where will nearly €1 trillion-a-DAY in euro-clearing operations go? But other finance operations might not go to the usual suspects.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

The UK economy’s prize “asset,” the City of London’s gargantuan financial services industry, is at the top of the menu of the forthcoming Brexit negotiations. For Britain’s Prime Minister Theresa May, safeguarding the City of London’s operations is a top priority. But for the EU’s negotiators, those operations represent both a valuable asset to covet as well as a huge bargaining chip in the forthcoming negotiations.

One area of activity that European authorities, both political and monetary, seem determined to get their hands on, at pretty much any cost, is the City’s vast clearing operations.

The U.K. is estimated to handle 75% of all euro-denominated derivatives transactions, equivalent to around €930 billion of trades per day. It’s also home to roughly 90% of US dollar domestic interest-rate swaps. Clearing is a huge business for the City of London. The world’s largest clearinghouse for interest rate swaps, LCH, is based there and is majority-owned by London Stock Exchange Group Plc.

It functions as a middle man collecting collateral and standing between derivatives and swaps traders to prevent a default from spiraling out of control. As Bloomberg reports, the role of clearing houses like LCH in global finance has become far more entrenched since the 2008 Financial Crisis and the inexorable expansion of derivatives trading.

The ECB, together with the French government, have been trying to seize control of the clearing of euro-denominated transactions from the City of London for years. Ironically, it was the European Court of Justice (ECJ) — the same court whose jurisdiction the UK government is now determined to elude — that, in 2015, stopped that from happening on the grounds that the ECB cannot discriminate against an EU member.

But if the UK leaves the EU, and thus the ECJ’s jurisdiction, that ruling will no longer be applicable.

According to Manfred Weber, a Member of the European Parliament and close ally to Anglela Merkel, once Britain leaves the EU, it must give up the right to clear euros. France’s finance minister, Michel Sapin, agrees. “This goes to the heart of the resilience of our [financial market] arrangements and of our sovereignty over our money,” he told the FT.

They have a point. After all, if a euro-clearing bank fails, it’s the ECB that will have to pick up the pieces. As Graham Bishop, a consultant on EU integration and former banker, told Bloomberg, the ECB “would be crazy to allow these huge volumes of activity with the potential to create an issue of financial instability within the euro area to continue outside its control. Can you imagine the Bank of England allowing gigantic amounts of sterling being settled in the euro area? No.”

Now, in what the FT describes as a “legal fait accompli,” the European Commission is preparing to issue legislative proposals next month that would limit London’s ability to host euro-denominated clearing activities. However, any attempt to move euro clearing away from London to the continent is likely to take years to implement, be hugely disruptive, and ramp up costs for companies across the region.

LCH was already required by its regulators to hold $83 billion of collateral at the end of March. London Stock Exchange Group Plc CEO (and former Goldmanite) Xavier Rolet estimates that a Eurozone clearinghouse would have to demand $77 billion of initial margin if it took over the clearing of LCH’s current euro-denominated swaps portfolio, and LCH held on to the other currencies.

Other trading and clearing businesses may also follow in their wake. If the benefits of scale from having their first or second HQs in London are diminished by having to move roles to Europe, banks may look to shrink their London operations even further. Some are already planning to do so. The City of London could lose up to 100,000 jobs in a worst-case scenario, warned Rolet. That was in October last year. By January, Rolet’s worst case scenario had got a whole lot worse: 232,000 jobs were now on the line, as well as overall market stability.

But where would the jobs go? Frankfurt? Paris? Luxembourg? Dublin? Amsterdam? Madrid? Milan (whose own financial sector is hanging by a thread)?

All of these cities are desperate to take a piece of the City of London’s action. Given that proximity to major seats of political, judiciary and regulatory power is an essential source of competitive advantage for major financial institutions, London’s most likely heir apparent is Frankfurt. It’s already home to the ECB and has also launched a bid to become the future host of the European Banking Authority, currently based in London.

But according to some, including Rolet, the biggest benificiary of London’s prospective demise as the world’s clearing capital is likely to be none of the above. In fact, it wouldn’t even be a European city.

Rather than moving their workforces en masse across the English Channel, banks are far more likely to move entire departments that can operate from just about any time zone, including those with global-facing roles in merger advisory, trading and back-office technology and finance, across the Atlantic.

“There is no way in the EU there is a center with the infrastructure or regulatory infrastructure to take the role London has,” particularly in capital markets, says John Nelson, chairman of Lloyd’s of London. “There is only one city in the world that can, and that is New York.” By Don Quijones.

Prices in this hotbed of global wealth fall most since 2009. Read…  London’s Deflating House Price Bubble Gets Messier

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  15 comments for “Is the City of London about to Lose its Crown Jewel? 

  1. michael Engel says:

    In early 1920’s the British closed the Real Bills clearing house.
    The Real Bills financed mfg. in the US , GB and Germany… The intention : to put German powerful industry out of business. To make sure that they will no longer be a threat, militarily, or economically. Especially to the new rising power after WWI, the USA.
    Remember the 1920’s “Cool”edge, well, the 20’s were not so wonderful for the Germans. on purpose. Later on, in the 30’s, not so great in the US
    and the rest of the world.

  2. Bill says:

    In 5 years won’t matter one bit.

    1 word: blockchain

    The “City” sees the future; buccaneering on a global scale vs. being shackled to the EuroNanny State?

  3. Bruce Adlam says:

    Well the EU won’t like that being controlled by New York .London doesn’t sound so bad. But Germany will want it. ….interesting lol

  4. JBV says:

    Maybe London will once again produce something of value and become a real city with real workers and real prices.
    This sort of money concentrated in one place is destructive to the social fabric.
    Mr. Stockbroker may have to get a real job and wash his hands at 5pm. It won’t kill him.

    • Mike G says:

      What are the odds the UKgov will screw over the real economy and non-financial people in the negotiations to preserve as much as possible of the City’s perks and privileges post-Brexit?

    • Petergforsyth says:

      It will. Snakes and ladders will be the rude awakening to the protected species.

    • Mary says:

      If you have ever stepped into a bank or took a loan it swiped your credit card halfway across the globe in some unknown currency, you would know very well whether the job is real or not.

  5. Paulo says:

    Why don’t they just move it to the Cayman Islands? At least then any money launderers and pillaging oligarchs can get a tan while they wink wink nod nod. Plus, the dealers will appreciate some fun in the sun, too. Shouldn’t miss a beat.

    • Lee says:

      Better hurry as bargains are slowing disappearing and the islands boom. There is even traffic congestion on the islands:

      “Plus, the expansion of the bypass to a four-lane highway which are vital projects aimed at relieving traffic congestion for those traveling to and from West Bay.”

      And a good tax system including property:

      “From serious property investors to first-time home buyers there are no ongoing taxes or property taxes.”


    • TJ Martin says:

      In a word … unstable politics and lack of infrastructure

  6. nick kelly says:

    I think France would have cultural barriers to serving as a world hub. For one thing they would probably expect business to be conducted in French.

  7. Frederick says:

    Warsaw Hopefully

    • d says:

      Frankfurt or splattered allover the place which will at least double the costs for everybody in Europe.

      The vindictive Eu is going to attempt to gut the city of London. Something Europe has been repeatedly doing for over 1400 years and failing.

      The Eu in the process will shoot itself in both feet and raise costs for all mainland european citizens.

      Brexit was engineered by junker the drunk, with the Backing of Tusk and the brussels eurocrats.

      If poland was smart it would federate with germany now.

      Problem for Poland being , the only bits germany wants, are the bits it had in 1914.

      Neither Poland or Germany want Brexit. Therefor they should bang some heads in Brusels and give the english what they need to stay.

      Brexit will hurt everybody the stance of Brussels to the Negotiations ensures it will hurt everybody an awful lot more than it needs to. Currently brussels is on course for no deal WTO rules in March 2019.And Chaos in April 2019 Starting a global depression in europe as never seen in modern times..

  8. Frederick says:

    d you wrote ” starting a global depression in Europe” Which will it be a global or a European Depression? Kyle Bass thinks it’s the Chinese banking system that’s going to blow everything up

    • d says:

      China still needs a trigger.

      Frequently an external event the triggered market host state administration can not control and did not foresee, or failed to give enough preventive thought to.

      Lehmans morphed into a global monster, when it revealed and unravelled, the greek debt fraud’s.

      Wall street 1929. The Trigger event was in Austria, a place over which the FED and the US administration, had no control.

      If Europe implodes, the only thing china can do is stop milking it, as pouring tons of CNY/RMB toilet paper into it, will solve nothing.

      As soon as china stops milking England andEurope, it has a HUGE budget hole. Look out below.

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