It is becoming clear as the dust is settling from last week’s Leave victory in the UK Brexit referendum that European country government and EU officials are going to do all they can to make it both difficult and expensive for the UK to leave the European Union.
Part anger? Part revenge? Part hoping to help reverse the decision?
Probably a little of each.
But regardless of the reasons, there are some key UK gems which European officials will be targeting in the coming months, several of which will be in London’s lucrative financial services sector.
With about-to-be-former UK Prime Minister David Cameron being Brexit Casualty #1, Casualty #2 just might be the London-based clearing firms, which are in the middle of trillions of dollars of transactions every year in currency, interest rate, and derivatives trades.
Financial clearing houses stand in between buyers and sellers of financial instruments, holding collateral from both, in case one side defaults. Clearing houses are in place in order to minimize disruptions when a trader cannot honor its obligations. They have increased in popularity since the 2008 financial which saw a number of large, supposedly safe financial institutions being unable to meet their obligations on out-of-the-money trades.
The European Central Bank (ECB) had actually tried to pry the Euro clearing business from the UK last year, but lost a European Court case on the matter. However that court decision was based on the UK (which of course has its own currency) being a part of the EU and subject to its rules. But now that key element has changed.
French President Francois Hollande made some remarks Wednesday at an EU leaders’ summit in Brussels that the EU should repatriate clearing of all Euro related currency and derivatives trades. Hollande remarked:
The City [London], which could handle clearing operations in Euros thanks to the UK’s presence in the EU, won’t be able to do them any more.
The UK based clearing houses, such as LCH.Clearnet (controlled by the London Stock Exchange) and ICE Clear Europe, a unit of Atlanta-based Intercontinental Exchange Inc (NYSE:ICE), stand to lose a lot of business – or at least may be required to move operations and personnel out of the UK and into continental Europe in order to keep their Euro business.
With the EURUSD – and derivatives built around that pair – being the most popular of all the currency instruments, the move of Euro clearing is not a trivial one. And may portend other financial businesses which could move out of London.