It’s easy to become overwhelmed by the sheer number of aspects of life which the advent of Brexit is, we are reliably informed, going to have a dramatic impact upon. What doesn’t help matters for anyone seeking to get a handle on exactly what the future holds is the fact that different ‘experts’ tend to have completely different points of view. On one day we might be informed that, on the day the UK leaves the EU, flights will no longer be able to take off for Europe and lorries arriving at Dover will be forced to join traffic jams stretching for miles and lasting for days. The day after, on the other hand, another selection of experts will be wheeled out to reassure everybody that there will, in fact, be minimum disruption and that the transition period will be such that the average person will barely notice the difference.
Add to this the fact that such reports emerge in response to a relentless twenty four hour news cycle, and you have a torrent of information which generates a great deal of heat but very little light indeed.
Under the radar
Against this backdrop, it’s surprising to note that one of the more dramatic possibilities opened up by the imminence of Brexit has received little publicity – namely the loss of euro clearing from London. To understand the role of clearing it’s probably best to think in terms of how a High Street bank acts as an intermediary in transactions. In the simplest terms, a bank takes money deposited by savers and gives out loans to borrowers. In terms of the larger financial markets, clearing is the process by which the sellers and purchasers of financial products are connected to each other, with the clearing process dealing with all of the administrative detail involved in any transaction which takes place.
In terms of trading on the Forex markets, the clearing houses act as intermediaries between the two parties , ensuring that the buying and selling of billions of euros worth of currency runs smoothly. Perhaps even more importantly, a clearing house acts as a guarantor, protecting investors in the event of a trade defaulting. Despite the fact that the UK has never been in the Euro zone, London has always been the global centre for the trading of Euros, handling £747billion worth of contracts – three quarters of the global total – every single day. Other major European financial centres such as Paris and Frankfurt have traditionally rather resented the leading role which the UK plays, and there’s a good chance they could see Brexit as their chance to grab a piece of the action.
This could happen if the EU acts on proposals to introduce stricter supervision of clearing houses by the European Securities and Markets Authority, proposals which would see the largest clearing houses – such as the London Stock Exchange’s London Clearing House – being forced to relocate within the EU’s borders. Under the proposals those clearing houses which are felt to be ‘systemically important’ would be forced to relocate within the EU, with others, as now, operating under European Market Infrastructure Regulation.
Experts have warned, on behalf of the London Stock Exchange, that any move to force the clearing house to relocate would cost as much as £78 billion and threaten tens of thousands of jobs. As with Brexit as a whole, however, the sense is that those based in all parts of the continent are wary of the massive change involved in relocation, and of the costs it would entail. The International Swaps and Derivatives Association said any forced move to another EU country would drive up costs for the financial sector as a whole, while the Futures Industry Association stated that such a move could double how much it costs finance companies to protect themselves against the risk of default.
The hope is that warnings of this kind could provide the catalyst for all sides of the argument to reach a negotiated compromise, although the fear must be that such hopes are largely in the hands of politicians with agendas of their own. If compromise can’t be achieved, then the loss of euro clearing could be one of the more drastic but less publicised ramifications of the entire Brexit process.