Where will nearly €1 trillion-a-DAY in euro-clearing operations go? But other finance operations might not go to the usual suspects.
The UK economy’s prize “asset,” the City of London’s gargantuan financial services industry, is at the top of the menu of the forthcoming Brexit negotiations. For Britain’s Prime Minister Theresa May, safeguarding the City of London’s operations is a top priority. But for the EU’s negotiators, those operations represent both a valuable asset to covet as well as a huge bargaining chip in the forthcoming negotiations.
One area of activity that European authorities, both political and monetary, seem determined to get their hands on, at pretty much any cost, is the City’s vast clearing operations.
The U.K. is estimated to handle 75% of all euro-denominated derivatives transactions, equivalent to around €930 billion of trades per day. It’s also home to roughly 90% of US dollar domestic interest-rate swaps. Clearing is a huge business for the City of London. The world’s largest clearinghouse for interest rate swaps, LCH, is based there and is majority-owned by London Stock Exchange Group Plc.
The ECB, together with the French government, have been trying to seize control of the clearing of euro-denominated transactions from the City of London for years. Ironically, it was the European Court of Justice (ECJ) — the same court whose jurisdiction the UK government is now determined to elude — that, in 2015, stopped that from happening on the grounds that the ECB cannot discriminate against an EU member.
But if the UK leaves the EU, and thus the ECJ’s jurisdiction, that ruling will no longer be applicable…