In recent months, Brussels has made a stand in the financial world. The European Union’s capital is demanding more control over London’s derivatives clearing – a move that could potentially have global repercussions. What does this mean for the way we do business, and how will it affect the London financial sector? In this article, we explore what’s at stake and why Brussels is making a stand for more control over London’s derivatives clearing. Read on to find out more!
What is the London Derivatives Clearing?
The London Derivatives Clearing is a clearing house for derivative contracts that are traded on the London Stock Exchange. It is regulated by the Financial Conduct Authority (FCA). The London Derivatives Clearing allows members to trade anonymously and provides a centralised clearing and settlement service for trades. This helps to reduce counterparty risk and promote market liquidity. The London Derivatives Clearing also offers collateral management services and supports the establishment of new trading venues.
What does this demand mean for Brussels?
The European Union is set to demand that London’s vast derivatives clearing business move to the Continent after Brexit in a bid to shore up the City’s status as a global financial centre.
The move would be a huge blow to the UK’s financial services industry and could see billions of pounds of business relocate from London to EU capitals such as Frankfurt, Paris or Dublin.
Clearing houses sit in the middle of financial transactions and guarantee their completion even if one of the parties involved defaults. The vast majority of euro-denominated interest rate swaps are cleared in London, making it a vital part of the City’s infrastructure.
However, the EU is now planning to use Brexit as an opportunity to seize control of this lucrative business. Under current rules, clearing houses based outside the bloc can operate in EU markets as long as they are regulated by a robust regime, such as that overseen by the Bank of England.
But Brussels is now considering changing the rules so that only clearing houses based in the EU would be allowed to operate in its markets. This would effectively force banks and other firms using derivatives to move their business from London to an EU city.
The impact of such a move would be enormous. It could cost London jobs, tax revenue and prestige as a global financial centre. And it would be another nail in the coffin for Britain’s post-Brexit economy.
What are the benefits of the London Derivatives Clearing?
London’s derivatives clearing is the largest in the world, handling trillions of dollars worth of contracts every day. This gives London a huge advantage when it comes to attracting business and investment.
The benefits of London’s clearinghouse are many and varied. Firstly, it provides certainty and stability for the markets. When a contract is cleared by a central party, both sides know that it will be honored. This reduces risk and helps to promote confidence in the markets.
Secondly, clearinghouses provide greater liquidity. This means that there are always buyers and sellers available, which makes it easier to trade contracts and helps to keep prices low.
Thirdly, clearinghouses help to reduce counterparty risk. When two parties enter into a contract, they each take on the risk that the other party will not honor their obligations. By using a clearinghouse, this risk is effectively transferred to the clearinghouse itself. This means that businesses can trade with each other without having to worry about the possibility of non-payment.
Fourthly, clearinghouses improve market efficiency. They do this by ensuring that trades are settled promptly and that prices reflect true underlying supply and demand conditions. This reduces costs for businesses and ultimately leads to lower prices for consumers.
Finally, clearinghouses promote financial stability by mitigating systemic risk. In other words, if one institution fails to meet its obligations, the system as a whole is not put at risk. This protects businesses and investors from losses in the event of a
How does this affect other European Union countries?
The European Union is set to make a stand against London’s dominance in the derivatives clearing market. This move could have major implications for other EU countries, as it would increase costs and reduce choice for users of clearing services. It could also lead to the relocation of some clearing activity away from London.
Conclusion
The demand for London’s derivatives clearing has highlighted the importance of UK financial services in Europe. Brussels is fully aware of this, and is using the leverage to further its own agenda. This could have far-reaching implications for both sides, which makes the outcome of these negotiations all the more interesting. Whatever happens though, it’s clear that Brexit will bring about seismic changes in Europe’s financial landscape – something that may take many years to resolve completely.
