ECB and Commission brace for standoff with London over Euro-clearing

ANDY RAIN

A man passes the writing of the London Stock Exchange Group (LSE) in London, Britain, 27 February 2017.

ECB and Commission brace for standoff with London over Euro-clearing


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Bank of France Governor Francois Villeroy de Galhau said on Thursday that he endorses the European Commission’s view that Euro clearing cannot remain in London after Brexit.

Move Euro clearing to the EU

Villeroy de Galhau was referring to a multi-billion Euro industry concentrated in London.

Euro-denominated clearing activities should be located in the European Union when they exceed certain thresholds,” Valeroy specified, arguing that Brussels should retain control over systemically important sectors that can affect the financial stability of the Eurozone.”

Speaking to Reuters, the French member of the European Central Bank board urged the Commission to put forward a more precise legal framework, granting Brussels the power to refuse to recognize a clearing house outside EU jurisdiction.

On May 31, the European Commission published a “reflection paper,” which satisfies the ECB in that it is bracing to give Brussels greater control over financial regulation. The ECB has little authority over financial markets because its mandate extends to the Eurozone alone and financial regulation remains largely a national prerogative. It is no secret that London is trying to keep the biggest share of the Euro clearing business by setting up “back-to-back” operations in the EU, whilst retaining high-value operations in London, such as risk assessment.

What is at stake

According to an EY consultancy report published by the Financial Times in November 2016, the sector means 83,000 jobs to the City of London. A London Stock Exchange study estimates that roughly 100,000 jobs depend on the sector. These are high-value jobs in banking, trading, asset management, technological support, legal and accounting services.

A lot of this industry is brokering, that is, the matching of buyers and sellers for a commission. For example, a Romanian manufacturer of car spare parts is linked to a Finnish car service center, matching demand and supply. The idea is that the broker has a deeper knowledge of the market than any individual firm. Moreover, the broker adds value by ensuring the transaction is effectively risk-free, “clearing it,” for a commission.

Speaking to a Bank of England event on Tuesday, June 20, the British Chancellor of the Exchequer, Philip Hammond, call out the demand for moving out the Euro clearing business from the City as a form of “protectionism” and vowed to embark on a global crusade for the liberalization of services.

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