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London’s euro clearing dominance poses risk, German politician says

The City of London Corporation has argued that fragmenting euro clearing would damage financial stability.

Germany has ramped up the rhetoric as the battle to wrench euro clearing from London after Brexit continues, with a top politician dismissing the City’s claim that fragmentation represents a risk to the financial system.

Tarek Al-Wazir, economy minister for the German state of Hesse, where the country’s financial centre Frankfurt is situated, said London’s own dominance over the euro clearing industry was in itself a concern for the EU.

He told the Press Association: “If you look at the risks … everything concentrated in one place is, at the end, the riskiest thing you can have.

“I don’t think that if you have two places, for example, or three places (where euro clearing is based) that it’s more risky. I think the opposite is true.

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City of London stock

“If you have the risk offshore – and don’t forget from the perspective of the European Union the UK will be something like ‘offshore’ … why should the European taxpayer accept that in case something goes wrong that you have to, in the worst case, help someone to survive if you have no possibility to somehow supervise what he’s doing?”

The comments come as rival European centres vie for the multibillion-pound market that could leave London as a result of Brexit.

The European Commission last year put forward proposals which would impose stricter supervision of clearing houses by EU central banks and the European Securities and Markets Authority (ESMA), and in some cases force bigger operations to move operations to the bloc.

The move brings London one step closer to losing its dominance over the euro-clearing market, which settles business and trade conducted in the EU currency.

I am worried that some of the repercussions from Brexit could introduce risk back into the system that we’ve managed to reduce. City of London Corporation’s policy chairwoman

But Square Mile figures have argued that splitting up euro clearing will lead to higher costs and threaten stability, citing a liquidity squeeze that would reduce clearing houses’ ability to diversify their risks.

City of London Corporation’s policy chairwoman Catherine McGuinness has said that if euro clearing fragments, it could “introduce greater risk into the system”.

“If we split bits of clearing we’ll lose that netting … there’s another question on cost, but by fragmenting clearing we could well introduce greater risk into the system. So that’s a real issue,” she said.

“I am worried that some of the repercussions from Brexit could introduce risk back into the system that we’ve managed to reduce,” Ms McGuinness added.

But Mr Al-Wazir also dismissed the idea of the greater cost implications, saying that it is simply an attempt to maintain clearing in London.

“We also read what the cost of euro clearing relocation would be, but if you really look closely on what was written there, it’s just not true.

“I understand what they do – or what they’re trying to do – of course they want to keep their business, I understand that.”

Champions for London have also argued that the process of relocating all or part of a clearing business would be legally and operationally complex.

The Bank of England has tried to ease the burden on banks and financial firms by allowing lenders and clearing houses to continue using existing passport rights to operate in the UK throughout the Brexit transition period until the end of 2020.

A report conducted by EY for the London Stock Exchange in the wake of the Brexit vote in 2016 claimed that up to 83,000 clearing jobs could be lost over the next seven years if euro-denominated clearing leaves London.

It said that job losses could create a domino effect on other financial sectors, affecting up to 232,000 jobs across the UK.

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