A French president taking an interest in the arcane world of financial plumbing is a sure sign of how Britain's neighbours plan to exploit its vote to leave the European Union.
By: Reuters | London |
Published: July 5, 2016 4:46 PM
A French president taking an interest in the arcane world of financial plumbing is a sure sign of how Britain’s neighbours plan to exploit its vote to leave the European Union.
Political skirmishes over clearing euro-denominated securities go to the heart of what’s at stake for Britain as it prepares to negotiate new trading terms with Europe.
Passporting rights, free movement of people and single market access are among the EU buzz words uppermost in the minds of UK-based bankers, telecom executives and airline owners who want to preserve market shares built up over decades.
Getting it wrong could, for example, see London shrink as a global financial centre, sending key players in the country’s biggest tax generating sector into the arms of foreign rivals.
City of London grandees sense an old-fashioned land grab.
“There are some people already seeking to pick over the bones of the UK very, very rapidly indeed. Everyone would be wise to take things a step at a time in this area,” said Donald Brydon, chairman of the London Stock Exchange Group, which owns LCH.Clearnet.
London-based LCH.Clearnet, which clears the bulk of euro-denominated interest rate swaps, the derivative contract widely used by companies to protect themselves against unexpected moves in interest rates, had no comment.
Clearing squares trades ahead of exchanging legal ownership for cash, making the transaction legally watertight.
After the June 23 referendum Leave vote, French President Francois Hollande said euro-denominated securities trades should be cleared in the single currency area instead of London.
The European Central Bank, as the ultimate backstop for the euro, also wants euro-denominated clearing shifted to the single currency area, which policymakers say would underpin financial stability.
Clearing can be done in London because of EU-approved “passports” that banks, exchanges, clearing houses and asset managers in Britain have been granted.
In return for complying with EU regulations, they can offer their services across the 28-country bloc just from one member state at huge savings in office space, regulatory compliance and staff.
The passport gives tariff-free access to a single market of 500 million people which forms the world’s biggest trading bloc.
Other sectors like pharmaceuticals, cars, telecoms, and airlines have their own EU single market, for example, the EU will scrap “roaming charges” for mobile phone calls made in another member state from next June.
FREEDOM VS PASSPORT
Faced with being locked out of the single market, banks are lobbying to keep their passports in some form after Britain leaves the EU, though few expect they will be as comprehensive.
“The most important thing is that we start with the presumption that we need very full access to the single market,” said Douglas Flint, chairman of London-based HSBC, Europe’s biggest bank.
Britain’s trade negotiations with the EU have yet to formally start and horse-trading is common in such talks.
“We will manage, whatever happens. It may not be as good as before,” said John McFarlane, chairman of Barclays bank.
Germany, France and EU officials in Brussels already say if Britain wants full access to the single market, it must not only apply the bloc’s financial rules, but also allow EU citizens to live and work in Britain.
This free movement of people is one of the four basic tenets of the EU’s founding treaty going back to 1957 – the other three are the free movement of capital, goods and services.
Without these four “freedoms”, the single market and its accompanying passport would not work well in practice, EU officials say.
The freedoms make it harder for national regulators to throw hurdles in the way of firms from other member states to shield local companies from competition.
Backers of Brexit want the free movement of people to Britain curtailed or ditched altogether from future trade terms.
“We will come to a crunch point of free movement of labour,” the City of London’s policy chief, Mark Boleat said.
A study for fund manager Neil Woodford has estimated that loss of passporting could see UK financial services exports to the EU halved, a decline of about 10 billion pounds.
Limited or no passporting rights would have major consequences for Britain’s ability to trade in the EU. It could, for example, make it harder for London to hang on to euro-denominated clearing.
However, David Clark, chairman of the Wholesale Market Brokers’ Association said there was no reason why clearing can’t stay in London as long as the Bank of England and ECB continue to offer their respective currencies to each other in a financial crisis.
Industry sources said that while the Clearnet half of LCH.Clearnet is already based in Paris, it only clears stock trades there.
It would need regulatory approval to also clear large volumes of euro-denominated swaps.
It would also need a bigger fund to cover any default by a member than it currently has, which would cost millions of euros for member banks.
“The reason those things are in London is that’s where it works,” agreed Barclays’ McFarlane.
While bankers bristle at being pressured to shift some of their clearing, the City could face more far reaching changes if single market access for financial services is not secured in new trading terms – the loss of actual banks to the Continent.
“It would be the shift in bank capital and liquidity that would be crucial for the long run because that is the heart and soul of their investment and business,” WMBA Chief Executive, Alex McDonald, said.