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Cleaning rooms and removing Euro London settlement

  • Author:hopely
  • Release on:2017-09-08

Clearing Houses and Brexit: Clearing out
New European proposals might force Euro clearing out of London.
Brexit has thrust a mundane, if crucial, bit of financial-market plumbing into the spotlight: the clearing of financial instruments.
Clearing-houses sit in the middle of a securities or derivatives transaction, and ensure that deals are honoured even if one counterparty goes bust.
In November a study commissioned by the London Stock Exchange (LSE) warned that if euro clearing was forced out of the City, 83,000 British jobs could be lost, and a further 232,000 affected.
On May 4th the European Commission said it was looking into new rules for euro-denominated clearing.

One option is relocation from London, an idea greeted in the City with a mixture of incredulity, disdain and fear.
In the wake of the financial crisis, the G20 group of big economies made it mandatory to settle most simple derivatives trades through clearing-houses.
By 2016, 62% of the notional $544trn global over-the-counter derivatives market was settled in this way.
Globally, London handles 37% of foreign-exchange derivatives and 39% of interest-rate derivatives, including three-quarters of those in euros.
So unsurprisingly, it also dominates clearing.
LCH, a clearing-house that is part of the LSE, clears over 50% of all interest-rate swaps across all currencies.
Around 75% of those in euros are cleared in London.
But centralising clearing concentrates risk: the failure of a clearing-house would be disastrous.
So clearing-houses require collateral from the counterparties using them, and must submit to close supervision.
The European Central Bank has long worried that it has no direct control over euro-denominated clearing outside the euro area, yet any problems would embroil banks and payment systems within it.

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