Xavier Rolet:
The proposal for joint supervision is the best way to keep monitoring risk and protecting standards
Business welcomed the Prime Minister’s Florence speech, because business needs certainty. Certainty breeds confidence, which allows investment in firms to innovate, grow and create jobs. We agree with the need for time-limited transitional arrangements to be arranged – quickly. A week may be a long time in politics, but in business it is nothing at all.
For a manufacturer, a hard Brexit may be manageable. A 7 per cent tariff increase would be overly offset by the 10 per cent devaluation in the pound post-referendum, with analysts predicting further falls following a “no deal” scenario. But the UK economy is 80 per cent made up of the service industry – much of it on a global scale and underpinned by global standards of complex regulation, ensuring access to markets such as the US and China.
Ten years ago, the financial crisis created a job-destroying recession and required multiple taxpayerfunded bank bail-outs. The G20 leaders vowed never again. Global regulatory cooperation was born and implemented through legislation such as Dodd Frank in the US and EMIR in the EU. Angela Merkel and Michel Barnier helped design and implement this system, especially around clearing.
Known as the “plumbing” of financial services, clearing now underpins the global financial system, ensuring millions of complex daily trades are settled in a safe and highly regulated manner. Clearing houses act as circuitbreakers in the system, guarding the market against company default by holding collateral and monitoring transaction risk. It became mandatory following the collapse of financial institutions during the financial crisis.
For the first time, global financial risk can be monitored. Global scale also permits greater efficiencies. Last year, London’s leading clearing house, LCH, which operates a global clearing liquidity pool, saved its customers $21 billion in regulatory capital.
A testament to the system’s effectiveness is that the US is content to see the majority of dollardenominated interest rate swaps cleared in the UK, as they have joint regulatory oversight and benefit from efficiencies. US regulators are also clear that this system cannot be replicated overnight. This is why it is imperative that transitional arrangements are agreed this year. Businesses cannot risk being so close to a cliff edge before accelerating the migration of functions away from the UK in order to participate in the global market.
So we welcome the European Commission proposal that EU and UK regulators should come up with an enhanced system of joint supervision. It is what we have with the US now. Given the urgent time constraints, we would welcome an update from our multinational set of regulators soon. The current arrangement guaranteeing UK access to the global market took three years to agree.
This ability to monitor globally and reduce risk is also why we are opposed to those who want to fragment this system of regulatory cooperation. Days after the Brexit referendum, the EU president, François Hollande, called for euro-clearing to be stripped from London and only permitted within the Eurozone. Many others in Europe have echoed these calls and the European Commission itself has not ruled it out. Aside from increased capital costs, this would increase systemic financial risk. The global monitoring of risk would be impaired as that risk became more heavily concentrated.
To those who want to dismantle a system of global regulatory standards that protects taxpayers, we say: “Do not diminish systemically important global financial market infrastructure just to make a political point.” Instead, get transitional arrangements agreed in time. Do so and the opportunity for a more positive post-brexit economic model for everyone is huge.
Those who want to expedite Brexit can get on with arranging individual trade deals, while any exit fee will earn something in return as we enjoy continued membership benefits for a defined period. Critically, the Government can put innovators and job creators at the heart of a post-brexit economic model by keeping the cost of global capital down and driving more long-term capital to UK and European small and medium-sized enterprises supporting productivity, exports and high-quality jobs.