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After the 2008 financial crisis, their concerns about market moves destabilising the euro and sovereign governments have focused on clearing, an unglamorous activity that prevents a default from spreading through the market like wildfire.
The industry has become one of the pillars of global regulators’ efforts to bolster markets after the near-meltdown of 2008. They sit between two sides of a trade in the securities and derivatives markets and manage the risk that a counterparty will be left out of pocket if one side defaults on payment. For the EU, that critical business had been handled in the City of London.
On the eve of the referendum, London Stock Exchange Group’s LCH handled 95 per cent of all euro-denominated interest rate derivatives, and more than a third of euro-denominated repurchase agreements, in which banks lend out assets in return for short-term financing. The UK’s impending departure from the single market posed two questions: would the EU be happy to leave the business in London and would it be possible to move the business?
The answer to the first is comprehensive. Michel Barnier, EU chief Brexit negotiator, has publicly questioned whether it is in the bloc’s long-term economic interest to allow the City of London to retain “such a prominent position” in serving European customers. Mairead McGuinness, the EU’s new financial regulation chief, is also adamant. “It is clear that the EU is heavily reliant on UK central counterparties and it will be important to reduce EU clearing members’ exposures to [them],” she said, talking about euro-denominated derivatives at the European Parliament in October.
But those exhortations have had mixed results. There has been no regulatory mandate demanding that the business move and it has relied on the market to resolve the problem itself. The EU’s greatest success has been in the shift of eurozone sovereign debt clearing to Paris, alongside related business in repurchase, or repo, markets...