Even though the Financial Times positions itself as the saner, more measured reporter on Brexit matters compared to the rest of the UK press, it nevertheless carries the water in a major way for the UK financial services industry. For instance, we’ve noted that it has published articles that were a bit too obvious media plants by bank industry lobbyists, not just by virtue of clearly reporting on them as a wish list, but also by the failure to point out that the demands were wildly out of touch with reality.
The latest demonstration of how the UK remains in deep denial about how weak a hand it has in negotiating Brexit is the widespread screeching over a completely predictable EU requirement, that Euro-clearing either take place on the Continent or if it stays in the UK, it must be subject to EU rules. But you’d never discern that from the screechy Financial Time headline, Brussels set for power grab on London euro-clearing, or the copy. From the article:
Brussels is rushing out proposals to impose EU control on the City of London’s lucrative euro-clearing market, forcing UK operators to either relocate or be policed by European authorities.
In a provocative regulatory salvo fired as Brexit talks begin, the European Commission is preparing to issue legislative proposals in June that would heavily restrict London’s ability to host one of its flagship financial businesses.
The powerplay by the commission will be a setback for London, which fought hard for six years to fend off French-led attempts to relocate euro clearing to the single-currency area. Although French and German finance ministers have warned that Brexit makes London’s euro-clearing dominance unsustainable, this hasty intervention goes further, threatening a legal fait accompli to enshrine location restrictions even before Britain leaves the bloc.
The authors do calm down and describe some of the scope of the likely changes later in the piece. For instance:
There is lively debate in Brussels over the proposal due in June and the precise way to hand powers over clearing supervision to central banks and the European Securities and Markets Authority, the EU markets watchdog.
Officials are considering a system of thresholds to determine if a non-EU clearing house should face increased European oversight or other measures, according to people familiar with the debate. This could allow current EU-US agreements to remain unscathed, if transatlantic activity does not change significantly.
Clearing houses handling bigger volumes of EU business would at a minimum be subject to more intrusive EU supervision, including access to data so that European authorities can monitor risk. This may cover smaller operators in London.
This development should come as no surprise. The pink paper mentions in passing that France tried to get Euroclearing moved to Europe a few years back. What it failed to state is that the ECB joined this suit (puts a rather different spin on things, no?) and that the reason that France and the ECB lost that fight is that the European Court of Justice ruled that the ECB could not discriminate against an EU member. No EU membership and the old plan is back on.
Demanding that Euroclearing be relocated or at least EU regulated is completely reasonable. It is the ECB that will bear the bailout risk of a failure of any Euroclearing bank. The US requires banks that clear dollars to have those operations regulated here, with most foreign banks having a New York branch to achieve this end and the dollar clearing taking place through that entity.
The Europeans are being prudent to move quickly. Given that it is becoming more and more obvious (as we pointed out from the get-go) that there is a very large gap between the UK and EU negotiating positions, the odds of a disorderly Brexit are not trivial. However, financial firms with London operations have been making contingency plans as soon as they got over the shock of the Brexit vote, such as getting additional foreign licenses and scoping out office space in EU cities. The faster the Eurocrats put these plans in motion, the more time the affected firms will have to assess their options and adjust.
The stakes are not trivial. While the “€850 billion daily” figure sounds ginormous, it consists overwhelmingly of the notional value of derivatives, which is vastly larger than the economic value of those agreements. This is a better rough and ready metric:
A report by EY late last year estimated that there could be 83,000 related job losses in London over the next seven years if euro clearing was forced out of the City.
A less stringent alternative is to make this formal “location policy” mandatory only if the UK is unwilling to accept EU regulatory conditions, such as acceptance of its rule book and extraterritorial oversight.
An open question is how many front office jobs might follow a back-office relocation. The banks themselves might not feel the need to move anything more than supervisory personnel over, but one would expect that some third-party technical experts who would be well paid might wind up relocating as well.
For Brexit fans, this shows clearly that the sales pitch that the UK would regain national sovereignity was a Big Lie. The UK is a small open economy. If it is to export to other countries, it needs to comply with their regulations. The alternative is to become much more like an autarky, which given the size of the UK’s import and export sectors, would mean a vastly smaller GDP, imposing a big fall in the standard of living and losses in wealth upon UK citizens. But the current strategy, and it will probably work with the heavily-propagandized British public for quite a while, is to blame evil Eurocrats rather than reckless, opportunistic UK pols.