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Tempting as it might have seemed in Europe to try to shift this vital if mundane financial activity into the eurozone, the bloc has concluded that, in practice, the result would be unnecessarily self-harming. True, the City would have been shown that Jean-Claude Juncker meant it when the commission president vowed that Brexit could “not be a success”.
Forcing central counterparties (CCPs) — the institutions that sit in the middle of securities trades guaranteeing each end’s commitments — to move business onshore would have split Europe’s pool of liquidity, denting London’s pre-eminence as the timezone’s largest financial centre.
The formula served up in last week’s EU proposal is a seductively Delphic solution to the question. The relocation threat has not entirely been taken off the table, and could be revived should the UK not co-operate.
Instead, what the EU is proposing is some form of joint supervision. UK based CCPs can continue to clear the lion’s share of euro-denominated securities and derivatives as they do now in London. But in return, those deemed by the EU to be systemically important (a small subset including LCH and US-owned ICE) must accede alongside UK jurisdiction to that of the EU. That means at the very least some form of joint oversight, and will in effect amount to following two sets of rules.
The EU’s concerns can be placed into two broad categories. One is entirely legitimate; which is that London-based CCPs must be regulated soundly. After all, feckless supervision would not just be a disaster for the UK’s financial system and its still battered taxpayer. The unpleasant fallout could be felt across the whole single currency bloc.
There is also a political desire to shield the euro and EU sovereigns from the unfavourable judgment of the markets — to prevent those verdicts from pushing up borrowing costs, for instance, or from putting troubled banks to the inconvenience of raising additional capital they may struggle to find.
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