Shifting trillions of euros of derivatives positions could be hugely disruptive.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
The growing prospect of a hard or disorderly Brexit is sending jitters through the global financial community. This week the Financial Times reported that a group of “large financial institutions with big London operations” had met with US Commerce Secretary Wilbur Ross to express their dissatisfaction with the lack of progress in Brexit negotiations.
“The fears over a potential Brexit no-deal are rising, as we move within 16 months of the UK’s exit from the EU,” said Joshua Mahony, market analyst at IG.
While New York stands to benefit from some of the disruption caused by the UK’s separation from the EU, there is rising concern that Brexit could set off global ripples. That fear was compounded on Friday after Teresa May announced plans to set the UK’s departure date and time (March 29, 2019 at GMT 23:00) from the EU in law, warning she will not “tolerate” any attempt to block Brexit.
“[The banks] are becoming nervous,” said City of London Corporation’s policy chief Catherine McGuinness after meeting representatives of US banks earlier this week. “It wasn’t just curiosity, it was concern at the lack of progress that we have been making, and nervousness that it had implications beyond Europe’s borders in terms of causing disruption to markets.”
For the City of London Corporation, the prospect of a messy Brexit is even more terrifying than it is for many of the global banks it hosts within its coveted Square Mile. The Bank of England has warned that up to 75,000 jobs could be lost in the financial sector following Britain’s departure from the European Union. But it’s not just jobs that are on the line; so, too, is the Square Mile’s role as the world’s most important financial center, not to mention the backbone of the UK economy.
In recent months the European Commission and the European Central Bank have redoubled their efforts to compel financial institutions to move at least some of their operations onto the continent. “I have a very clear message to both smaller and larger banks: the clock is ticking,” said Sabine Lautenschläger, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB. “No one knows how Brexit will play out, and that’s why all affected banks should prepare themselves with a hard Brexit in mind.”
Some banks are already taking action. Goldman has set aside the top eight floors of a 37-story block under construction in Frankfurt which is expected to be ready for occupation in the third quarter of 2019. Just a few months before that, construction work on the bank’s new £350m European headquarters in central London should be completed.
Ten days ago, Goldman Sachs CEO Lloyd Blankfein, posted a tweet of an aerial shot of the half-finished construction in London, with the words “expecting/hoping to fill it up, but so much outside our control.” As the head of an organization with alumni at the very top of both the Bank of England and the European Central Bank as well as tentacles that reach out to just about every corner of the old continent, Blankfein is clearly selling Goldman short, if you’ll excuse the pun.
Goldman’s not the only major bank hedging its bets. On Tuesday Germany’s struggling behemoth, Deutsche Bank, announced that it had signed an agreement to occupy at least 469,000 square feet at a site under construction in the City of London. The move comes despite a warning in April that thousands of Deutsche Bank’s UK staff may have to relocate after Brexit. To that end, Deutsche has begun work on a Frankfurt booking center that would take up some of the slack if the German lender was forced to turn its London branch into a subsidiary when Britain leaves the EU.
Most banks would prefer the status quo to continue, with the lion’s share of their operations remaining in London, which already has the physical infrastructure, legal apparatus and friendly political and regulatory culture needed to support the full gamut of global financial services. But the Brexit vote has presented rival European nations and the ECB with a golden opportunity to undermine the UK’s domination of Europe’s financial industry. They won’t let it go to waste.
In Germany, the benchmark index, Deutsche Boerse, has introduced a profit-sharing scheme on interest rate swaps at its clearing business as it seeks to wrest trade from the London Stock Exchange, which it came within a whisker of acquiring just months ago. Some of Europe’s biggest trading houses in swaps, Bank of America Merrill Lynch, Citi, Commerzbank, Deutsche Bank, JP Morgan, and Morgan Stanley, have already registered an early interest in the program, Eurex said.
For the City of London, the potential loss of its dominance of Europe’s clearing business would be a hammer blow, as we warned in May. 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. If it were to lose much of that business, as many as 232,000 jobs could be on the line, warns London Stock Exchange Group Plc CEO (and former Goldmanite) Xavier Rolet.
However, any attempt to move euro clearing away from London to the continent is likely to take years to implement and will ramp up costs for companies across the region. In September the US Commodity Futures Trading Commission (CFTC) Chairman Christopher Giancarlo warned the European Union against making “unilateral” changes to how the bloc treats foreign clearing houses amidst fears that shifting derivatives positions totaling trillions of euros across the English Channel could be hugely disrupting.
With so much at stake, the outcome of the next year and a half’s negotiations between London, the world’s most important financial market, and the EU, the world’s largest trading bloc, is likely to have implications far beyond the EU. If a hard, messy Brexit cannot be averted, what happens next in the global financial markets will ultimately depend on whether or not the banks, regulators and central banks have taken enough provisions for an event that is both entirely unprecedented and wholly unpredictable. And that is hardly comforting. By Don Quijones.
“Testimony to the iron grip the financial industry’s lobby still exerts on governments and legislators.” Read… The EU Just Did the Big Banks a Massive Favor
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As Max Keiser correctly notes, London is the epicenter of global financial fraud. Other TBTF banks outsource their fraud to London, i.e. like JP Morgan with The London Whale. The real question is, how is BREXIT going to affect the various financial rackets and dirty money laundering being run out of London?
Yes, Don Quijones has been saying this for years, for example….
The City of London handles an estimated E930 billion in euro-denominated derivatives transactions per day! That’s about $1.08 trillion of paper shuffling.
“Welcome to the jungle, we got fun and games
We got everything you want, honey we know the names
We are the people that can find whatever you may need
If you got the money honey, we got your disease”
Who cares about providing capital to the real economy when you can make a profit by trading derivatives back and forth? It’s so much easier to make up money out of thin air than have to work for it. I wonder what the actual value of the assets are on which the derivatives are based? The beauty of derivatives trading is, you can make money by trading something that doesn’t have any value beyond the trade itself.
Bear trap. Repeat after me, there won’t be any disruptions.
Brexit in 16 months? No one can say who will be the Prime Minister in the UK in that time.
It’s ice cream in Berlin in fifteen days… or ice cold in no man’s land in fifteen seconds!
Oh the perils of an economy based on financialization . Another English betting parlor on the skids.
As I and others have noted, The United States Of America is is the epicenter of global financial fraud mostly know as the US dollar. Since before the gold standard disappeared the US has been in a very successful campain to have banks and financial institutions all over the world, be is private or state owned, have dollars as part of their assets and so give it a value that in practice has replaced the gold standard with mere paper money printed in the US.
Since decades ago it has got to the point the US is unable to back all the US dollars circulating worldwide.
So to sum it up, the day the US falls upon the weight of its increasing growing debt we will have a global economic crisis that will be so huge that it will be unbelievable because there is just so nany dollars Worldwide there is no reliable numbers of how much it is, just a few estimates.
Now back to Brexit, the Eurozone will have to gives the UK a few things they want or else.
I think you’re saying any fiat currency is a fraud?
Because I don’t think any currency nowadays is backed by gold.
Yes, it’s all a mass delusion. We’ll wake up one day and find that all of our money has become as valuable as the pixels that make up viral videos. The value of gold, however, is not a delusion, because you can hold gold — it’s edible and delicious.
Chocolate covered in gold dust is a thing, but I do not think is healthy to eat it.
Nick – in defense of our current currency (lol) I have to say, it’s a delusion that’s shared by literally billions of people. It’s printed on special paper. It’s elaborate and frankly, kind of neat to look at. Taking a “walk” around a piece of US currency with a loupe can be pretty interesting.
Someone who put the same amount of effort into creating pieces of paper or Tyvek (like Australian money, so you don’t destroy it in your afternoon surfing session) and got enough people to agree that one “yanger” (as we used to call the money of whatever country we were in, way back when) is work $1 or $2 or whatever exchange rate, could actually be the founder of a new currency, and their profit would be the face value of the currency minus the production costs.
Just don’t call it “dollars” ya doofuses. That will get you in trouble. You can call it bucks, greenbacks, whatever. Calling their silver rounds “Liberty Dollars” is what got some survivalist type in trouble a few years ago, it wasn’t the space lizards out for him, it’s that he called them dollars.
If you are holding gold, someone else may well kill you so that they may hold the gold themselves.
Just glance at a history of the Dark Ages: an endless cycle of violence to get hands on gold and jewels.
In ,during their last big crisis, a man was tortured to death over one gold coin…..
Personally, I’m quite happy with the current set-up
Nope Khadaffii tried that and it didnt work out so well for him
Yes they are ,China and Russia hoarding huge amounts of gold.
NO THEY ARE NOT. Backing currencies with Gold.
“China and Russia hoarding huge amounts of gold.”
They are not backing their currencies with it and they have no intention of backing their current, currencies, with it.
The Gold is for after the fiat implosion. So thay can start the asset extraction cycle from the west, and rest, again.
Those criminal nations are making huge fortunes by printing their and other fiat currencies into worthless,
Whilst grabbing all the hard assets they can, with their printed used toilet paper.
I think there’s been a lot of fear talk about the banking industry and Brexit.
The banks know that moving to Germany-France will cause them major issues with more regulation under EU rules than being in the UK.
If we lose jobs in the banking sector, good, a truly awful industry which cost the UK a fortune in bailouts and QE when 2008 occurred.
Apart from the people working in the industry, it has done nothing good for the UK.
I was reading somewhere the next financial hit could be in 5 years, if its moved to Europe they can pick up the tab.
Where will the US and other bank do their dirtiest laundry if not in London ?
Malta, Latvia, Estonia, Slovakia and of course Frankfurt. The Travelling Tivoli just packs their tents and move their rides to yet another field, no biggie at all.
Even Denmark could work. There is some advantage to being outside of the EUR-Zone, namely, that nobody really bothers to check the sizing of the bailout packages.
And one can legally set up a holding company in Denmark and pay Zero in taxes on whatever the subsidiaries are doing.
On top, Danish politicians are super-cheap, so cheap that that we have officially no corruption at all. Probably because all it takes to buy influence is some phone calls, a very glossy televangelist-style presentation at some up-scale hotel – *maybe* a paid conference in Dubai or a hunting trip or a cushy con-slut-tant job offer, but only in the really hard cases.
The biggest I heard about going down was some politician selling his Ford Taunus, 1980’s vintage, for 275k DKK to some bloke lobbying for fishing rights … but … It’s A Vintage Car … some might call it a rust-bucket but there is no accounting for taste.
where even the deals too shady for channel island tax havens go.
Well my goodness, don’t Banksters thrive on a little bit of Regime Uncertainty. Hopefully they will all move to BankFurt – it is a souless wasteland blessed by a decent airport. Perfect for this species. As for the bigger picture – to paraphrase Sartre’s “Hell is other people” – really for Banksters it is “Hell – it is counterparties”. Goes maybe with a trillion times more emphasis for The German Bank, with its derivatives book. Good luck with that, regardless of Braffleing, and regardless of who scores the highest floors on some inflated fiatskraper.
“This week the Financial Times reported that a group of “large financial institutions with big London operations” HAD MET WITH US COMMERCE SECRETARY WILBUR ROSS to express their dissatisfaction with the lack of progress in Brexit negotiations.”
Now, why in the world would that “large group” meet with Wilbur to express their dissatisfaction?
Could it be that Wilbur will now meet with Janet and Donnie so that Donnie will decide to pick up the phone and order Theresa to stop this whole Brexit “bad deal” thing, or else (another “or else” in a very long line of post-911 “or elses” from US presidents to various US-lap-dog PMs)?
Quite obviously, that’s exactly what the TBTF banks expect. We’ll soon find out if Donnie disappoints.
I believe that the outcome of the Brexit negotiations will likely be something that looks like a duck and quacks like a duck, but isn’t a REAL duck. It’ll be Brexit-extremely-light — so extremely light that there will be no discernible change to anything but some definitions of words (the word “leave”, for example) and some different-name-but-does-the-same job titles (“MEP” to perhaps “Advisor to the EP”, along with a different seating location in the hall).
In short, the final outcome of these negotiations will be yet another “whatever it takes”, smoke-and-mirrors, rearrange-the-furniture-and-paint-the-walls Elite experiment that, practically speaking, changes nothing; and all the TBTF bankers’ sky-high blood pressures will quickly return to normal.
But the all-important political thing is that whoever is PM can tell the bewildered herd grazing in Britain that the sovereign governemnt of Britain fulfilled the will of those who voted for Britain to “leave” the EU.
Nothing is outside the control of goldman sucks nothing.
Hard to fathom in the age of electronic instant cross border communication that moving offices and computers away from the City of London is in some way problematic. Is is possible they would move somewhere less restricted, where stuffy bureaucrat regulators would come knocking on their door, saying lets see whats on your hard drive? That populist protesters would gather outside with signs saying Register Derivatives, Not Guns! Since no one really knows who any of this works (esp CBs) it should be interesting.
It’d be great if they all moved to Dubai – and then after they find out that they chop bits off for stealing.
Don’t forget if they do move, the UK staff might not be able to work in EU and the UK company probably can’t trade in the EU(so they might have to train new staff,pay out refudancy to UK staff or have seprate UK and EU subsidiary and the other EU subsidiary has to go through licensing (why Lithuania set up quicker license process) They can put 4 people there , license and passport to the EU and move the rest to Frankfurt or Dublin or wherever
They might all have to move somewhere with higher taxes the horror ( UK actually had lower tax rate than Bulgaria)
While the banksters have no fear of our captured regulators, enforcers, or institutions of governance, a nightmare scenario for them is facing trials for financial malfeasance where juries comprised of the same proles the TBTF banks have been screwing over with joyous abandon might return the favor. As much as I detest JP Morgan and other banksters, the populist desire to stick it to the banks can run amok if juries act out of spite rather than in accordance with the law and justice. Outlandish ($8 billion) judgments, if allowed to stand, could end up crippling a financial system that is already riddled with unbridled corruption and fraud. I would much rather see huge judgements against regulators and enforcers who have allowed the banksters to defraud the public with impunity.
I certainly agree that the outcome you suggest is the one favoured by government, opposition and many others. Unfortunately for them, we in the grazing herd are not only bewildered, many of us are suspicious and watchful, while the aroma of a large rat that we can all smell is all-pervasive. Nigel has retired and we await a new hero…
“Nigel has retired”
Having set teh cat among teh piegons and created a Horrendous mess.
Nigel has stepped far back so that the splattering excrement stays well away from him.
After it has all landed, he (or his protegees)will be back to point the finger and display his superiority. By explaining how its all been done wrong.
Before beating the Kick the immigrants out so we can have job’s drum.
All very predictable from the outside looking in.
What should be interesting for readers of this article to note is that the Brexit referendum took place on the 23rd of June, 2016 and the date I’m typing this comment is November 14, 2017.
If my math is correct, the honorable politicians in Britain and the honorable politicians of the EU/EP have had approximately 508 days — 508 days, and counting, to decide/agree-upon, at the very least, SOMETHING.
Now the interesting part; just exactly WHAT have these literally thousands of highly-paid, honorable politicians/assistants/advisers/economists/sociologists/etc. decided/agreed-upon after 508 days of, for lack of a better word, “interacting” with each other?
The clock started from the day the article 50 letter was delivered.
Bad information is worse tahn no information.