What is the Implication of Clearing Moving Out of London, post Brexit?
Currently London is the hub of clearing euro-denominated derivatives. For clearing houses to be authorized under EMIR, they have to be approved by ESMA. Since Brexit negotiations began, it is clear that the EU wish to move euro-denominated derivatives clearing into the EU. Doing so could force clearing houses located in London to move into Europe.
The European Commission has drafted a new law that will require systemically important firms in the EU to be overseen by the EU authorities or be forced to move their euro clearing operations to within the EU. Since the UK have not agreed to extra territorial oversight thus far, it is unlikely they will agree to this now. This means that in order to comply with the new law, it is likely that euro clearing will move into the EU. Such a move could lead to enormous costs and massive job losses in London.
At the moment UK firms (including the London Stock Exchange) clear as much as 75% of euro-denominated interest rate swaps. The financial industry and ISDA® have referred to a survey from 11 banks showing that if euro-denominated interest rate swaps had to be cleared by an EU-located clearing house, it could increase the required initial margin by as much as 20%, making it far more expensive to clear through an EU-domiciled clearing house. The other increased cost in relocating to Europe would be in capital requirements for EU firms (and these would undoubtedly be passed on to clearing members and clients).
In short, it seems that moving euro clearing into the EU will not only result in large scale job losses in London and the removal of a substantial income stream for the UK economy, but will hit the clearing members and their clients too with increased costs. It’s a lose-lose scenario all round.
DeriviDoc offers the following clearing training:
24 October 2017 in Cape Town
09 November 2017 in Johannesburg
25 October 2017 in Cape Town
10 November 2017 in Johannesburg