05 May 2017

InFacts: Goldman’s London warning least of City’s worries

The Commission laid out the options to keep under control the risk London based euro clearing pose for financial stability in the EU after Brexit: One is to require London-based CCPs to move to the euro area – with the consequent loss of jobs and tax revenue. The other, to submit to EU rules.

The past few weeks have seen a steady drip drip of statements from foreign investment banks based in the City of London about the way in which Brexit is forcing them to start preparing to move chunks of their business out of the UK.

• At the end of April Deutsche Bank, Germany’s biggest bank and long one of the stalwarts of the City’s role as a global financial centre, disclosed that it was considering moving 4,000 of its 7,000 London based employees out of the UK.
• JP Morgan said earlier this week that it could move 1,000 jobs from the City.
• Today Goldman Sachs joined in. Lloyd Blankfein, its chief executive, warned that the bank had “contingency plans” to move some of its 6,500 London workforce out of London depending on how the Brexit talks go.

Not too bad, you might say. London’s Brexit-related job losses to other EU financial centres – Frankfurt, Paris, Dublin or, more worryingly, New York – are a trickle not a flood.  

More ominous for Theresa May, however, was the news yesterday that the European Commission is studying in detail a proposal to require giant, central counterparties (CCPs) to be located within the euro area, stripping London of this business. These financial institutions clear around €850 billion a day of derivatives contracts, according to the Commission, three quarters involving euro denominated trades.

Such a policy could lead to as many as 83,000 trading-related jobs moving out of the UK according to a report by accountants EY. This would be a significant blow to London, not just because of the loss of the business, jobs and tax revenue, but also because London-based CCPs play a vital role reducing risk in the global financial system.

The UK government has long been worried about the European Central Bank’s policy of wanting critical, euro-related, payments and trading systems infrastructure located geographically within the euro area. In 2011, the Treasury took the ECB to the European Court of Justice to annul its “location” policy to CCPs. It won the case in 2015 – giving a lie to Brexiters’ arguments that the ECJ works against British interests.

But, then, the UK was a fully paid up member of the EU. In future, things will different.

So, on Thursday, as part of a package reviewing the regulations for market trading infrastructure, the European Commission said it was revisiting the ECB’s location policy. It said that the EU needs to assess the implications London based euro clearing has for financial stability in the euro area. It also laid out the options it has in mind.

One is to require London-based CCPs to move to the euro area – with the consequent loss of jobs and tax revenue. The other is to keep euro derivatives clearing in London, but only if we submit to the EU’s supervisory regime and legal system, namely the ECJ. So much for taking back control.

Full piece on InFacts

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