Brussels move against City would ‘backfire’
Plan drawn up by Brussels would hurt firms in Europe far more than in Britain, warns boss of LCH
Forcing the clearing of trillions of euros in derivatives out of London would backfire on Brussels, the boss of one of the world’s biggest clearing houses has warned. The move would affect few British businesses, but would prove very harmful for EU companies, according to Dan Maguire, chief executive of LCH Group.
A CONTROVERSIAL plan by Brussels to force the clearing of trillions of euros in derivatives out of London and into the eurozone would backfire spectacularly, the boss of one of the world’s biggest clearing houses has warned.
The move would only affect a tiny proportion of British businesses, but prove very harmful for EU companies, according to Dan Maguire, chief executive of LCH Group, which cleared derivatives worth more than $850trillion this year.
The tussle for control of a serious chunk of the clearing market has emerged as one of Brexit’s key battlegrounds. London is the focal point for clearing derivatives in the US dollar and the euro, but the European authorities want all activity in euros activity to take place within the EU after Brexit.
“There is discussion about forcing the relocation of euro-denominated clearing by Eu-based clients to within the EU only. This covers only 7pc of LCH’S total cleared volumes and we could still serve these customers as we are a global business with Eu-based clearing houses,” he said.
“However, the impact of denying Eu-based clients access to the global liquidity pool for euros would simply be to grant them access to a much smaller and restricted liquidity pool, inevitably making it more expensive for the EU clients, end users and real money users of swaps.
“Furthermore, the forced fragmentation of a safe, efficient and well functioning market also risks damaging financial market stability.” Mr Maguire believes that European authorities have not properly considered the full implications of their plan, and notes that other currencies such as the US dollar are important because they are traded and cleared globally – so trying to stop this for the euro would also be harmful to its international status.
“The fundamental underpinning a global reserve currency such as US dollars and euros is that they can be traded, cleared and settled globally,” he said.
“For a currency to be a global reserve currency it must be allowed to flow without restriction; any form of exchange control, such as a location policy, would potentially negatively impact that currency.”
The idea of forced relocation is difficult because currency transactions by definition must include two different currencies, so trying to seize control of the euro trades would also mean trying to control the clearing location of the other currency involved.
Instead, Mr Maguire wants to see the EU take a similar approach to the US, which means taking an active involvement in the international system without trying to seize control.
“We welcome the European Commission proposal that EU and UK regulators should coalesce around determining an enhanced system of joint supervision as a first resort, post Brexit, and that any form of location policy should only ever be considered as the last resort,” Mr Maguire said.
“Joint supervision is not a new concept, it is what we have between the UK and the US now.
“There are models and mechanisms that are in place today that can work to ensure that the legitimate interests that may arise for a eurozone authority can be addressed without creating artificial and distortionary barriers to the flow of trade, which is essentially what a location policy would create.”