With Disorderly Brexit Increasingly Likely, EU Blinks on Derivatives-Clearing in London

No one can afford even the smallest hiccup in derivatives.

After months of furious lobbying, the City of London Corporation has finally got what it wanted: recognition by the European Securities and Markets Authority (ESMA) of the three biggest clearing houses it hosts, LCH, ICE Clear Europe and LME Clear. This will allow the three to continue providing services throughout the EU even in the event of a no-deal Brexit, which is looking increasingly likely. It will also limit the potential for disruption in central clearing and prevent any negative impact on the financial stability of the EU, says ESMA.

Clearing is where a company acts as a middleman between financial trades, collecting collateral and standing between derivatives and swaps traders to prevent a default from spiraling out of control. Since the 2008 Financial Crisis and the inexorable expansion of derivatives trading, clearing has become an integral part of the global financial infrastructure.

For the City of London, clearing is the jewel in its crown providing thousands of jobs, billions of pounds in annual profits and a vital strategic edge over rival financial hubs. London is the global leader for the clearing of all kinds of currency-denominated derivatives, particularly the euro. The London Clearing House (LCH) says it clears €927 billion ($1.05 trillion) worth of euro-denominated contracts a day, roughly three quarters of the entire global market. The second-largest operator in the sector, Paris, clears just 11% of the transactions.

For years, the French government, together with the European Central Bank, have tried to wrest control of the clearing of euro-denominated transactions from the City of London, for largely justifiable reasons. And Brexit was supposed to provide the perfect alibi. But alas, it hasn’t happened

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