City should prepare for a € 900 billion Brexit if Brussels plays a political role

The City and several financial services groups in Brussels are pushing for an extension of access to the clearinghouse beyond June next year.

Yesterday, a trio of large lobby groups for the European finerv sector called on Brussels to expand EU access to London clearing houses amid warnings of financial instability.

The groups wrote to the European Commission today, warning “that there is a significant risk of market disruption to EU clearing members and their customers” if the deal is not extended beyond June 2022.

If there is no extension, the City runs the risk that the very large euro-denominated derivatives of the large clearing sets will be removed from the Square Mile, currently clearing around 900 billion euros each day.

In Brussels, the general opinion is that any constitutional political change – which Brexit effectively is – must in no way endanger the economic stability of European financial markets.

Discussing the situation with London-based Tim Focas, head of capital markets at Aspectus Group, he said “worryingly, if the offer of the Brussels bureaucrats to punish the City for political gain is successful, we are moving towards the chaos of having several European clearinghouses. “

“This will only serve to severely restrict the efficiency of the market which, as a by-product, will affect economic growth and job creation,” Focas said. City AM this morning.

In order to make derivatives less risky, clearing houses, which sit between UK and EU financial institutions to trade, require initial liquidity from both sides when a trade is closed.

If fragments are cleared in different parts of the world, the very large euro-denominated derivatives will be removed from the large London clearing sets, which currently clear around 900 billion euros per day.

Eurostar announced today that it has received a £ 250million refinancing plan from a group of banks in an attempt to shore up its finances amid the Covid-19 pandemic.

“There’s just a pretty big problem if that happens. This will lead to smaller clearing sets in separate clearing houses, ”Focas said.

“In real terms, this means higher costs and, more importantly, reduced capital efficiency, as companies have to provide more liquidity as collateral,” he added.

“With this in mind, instead of the government just hoping that lobbying from the city will save the day, it makes more sense to actively promote co-surveillance of customs clearance with the EU,” Focas said.

Joint monitoring

Joint monitoring by ESMA and FCA is one way forward. After all, there are significant differences in the size and structure of Clearing Members across Europe. Some small businesses operate on a subnational basis, while large investment banks operate across Europe.

In some cases, certain clearing services may be offered on the one hand by large players and on the other hand by smaller ones.

GERMANY-CHINA-DIPLOMACY-TRADE

“A combined regulatory system would adjust supervision accordingly to accommodate some of these nuances, removing the pitfalls of a single authority, be it FCA or ESAM, dictating the best approach,” said declared Focas.

Why would this system work? This would allay any understandable fears among the market about a single regulator leaning towards protectionism, he argued.

“Not only does this ensure a margin of regulatory competition across Europe, but it could also improve decision-making by sharing knowledge and expertise across national borders. “

“In addition, as far as it is politically possible with still raw feelings after the bitter political divorce, a common approach can encourage faster decision-making,” Focas explained.

In turn, this could significantly reduce the costs that trading companies incur due to regulatory delays. “And who would be against creating an environment of greater information sharing between UK and EU lawmakers – especially around a systemically important function like compensation?”

Now is not the time to politicize clearing, which would hamper the future growth and prosperity of the EU and UK capital markets.

“Instead, policymakers should strengthen the clearing links and promote the financing of economic growth and prosperity in a post-Brexit world,” Focas said.

“Not only would this negate concerns in Brussels about a lack of control, but it would also maintain the City of London’s position as the pan-European champion of global compensation. Ultimately, if politicians fail to agree on a working compromise, other global financial centers (notably the United States) will be more than ready to pounce. »He concluded.

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