Brexit: City of London backed to thrive by Daniel Hodson
This morning, the European Commission has announced that US central counterparts will be regulated in an equivalent manner to their European peers. The so-called equivalence decision will allow US central counterparty clearing houses (CCPs) to apply for recognition by the European Securities and Markets Authority (ESMA), the EU financial watchdog. Once recognised by ESMA, these US CCPs will be able to provide central clearing services in the EU.
Mairead McGuinness, the European Commissioner responsible for Financial Services said in the statement: “This decision is a significant first step in the process of recognising US CCPs registered with the US Securities and Exchange Commission in the European Union.
“We look forward to continued good cooperation between EU institutions and agencies, and the US Securities and Exchange Commission.”
A clearing house acts as a mediator between any two entities that are engaged in a financial transaction.
Its main role is to ensure that the transaction goes smoothly, with the buyer receiving the tradable goods he intends to acquire and the seller receiving the right amount paid for the tradable goods he is selling.
Since the 2008 financial crisis, regulators have pushed more trades through clearing houses to ensure visibility for supervisors.
Previously, vast swathes of the derivatives market was uncleared, with trades handled bilaterally between banks.
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Mairead McGuinness, the European Commissioner responsible for Financial Services
The move comes as UK clearing houses have also been seeking a permanent equivalence decision by European authorities.
Last year, the Commission adopted a time-limited 18-month equivalence decision for UK clearing houses, in an effort to avoid financial stability risks arising from Brexit.
The decision extended European market access to UK CCPs until mid 2022.
But while the UK-EU trade deal secured on Christmas Eve avoided large-scale trade disruption, it was notably lacking in provisions for financial services.
Prime Minister Boris Johnson himself conceded it “perhaps does not go as far as we would like” for the City.
Talks about better market-access arrangements hinge on the EU providing substantive equivalence.
But legal and regulatory experts see little prospect of any quick and far-reaching agreement that would grant – and guarantee – this status for swathes of the UK industry.
Commenting on the European Commission’s announcement today, financial expert Frances Coppola wrote on Twitter: “Oh blimey, that’s a kick in the teeth for Johnson.
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The City of London
“I’m not sure this is quite what Rishi Sunak had in mind when he talked about Big Bang II [for the City of London].”
With US “equivalence”, EU banks can use US clearing houses and thus deal with Wall Street instead of London.
Over time, Brexit Britain could be frozen out.
At the moment, London is the world leader for the clearing of all types of currency-denominated derivatives including the euro.
The London Clearing House (LCH), which is part of the London Stock Exchange, says it clears a whopping 927billion euros-worth of euro-denominated contracts a day, this is some three quarters of the global market.
In contrast, Paris, the second-biggest operator in the sector, clears just 11 percent of the transactions.
A Twitter user noted: “Well, now the UK can’t block it.
“Whereas before there was an EU interest in protecting the City as the EU top financial market, this interest no longer exists.”
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French President Emmanuel Macron
It is no secret that the bloc’s main hubs have been trying to use Brexit to spell the end of London’s status as one of the world’s leading financial hubs.
After attending talks with various French authorities already in 2017, former Foreign Office Minister Jeremy Browne, who was acting as the City of London’s envoy on Brexit, said that Emmanuel Macron’s France was actively seeking to exploit Brexit to disrupt and degrade Britain’s lucrative financial sector.
In a leaked memorandum, he said his time in Paris had been “the worst”, with the French open about their desire to see the UK weakened.
Mr Browne, who met banking chiefs, senior politicians and diplomats, wrote: “They are crystal clear about their underlying objective: the weakening of Britain, the ongoing degradation of the City of London.
“The meeting with the French Central Bank was the worst I have had anywhere in the EU. They are in favour of the hardest Brexit. They want disruption.
“They actively seek disaggregation of financial services provision.
“Every country, not unreasonably, is alive to the opportunities that Brexit provides, but the French go further, making a virtue of rejecting a partnership model with Britain and seemingly happy to see outcomes detrimental to the City of London even if Paris is not the beneficiary.”
Mr Browne – a Liberal Democrat minister in the coalition under David Cameron and Nick Clegg – said hostility to the UK was not confined to a few officials but represented a “whole-of-France collective endeavour”.
He added: “The clear messages emanating from Paris are not just the musings of a rogue senior official in the French government or central bank. France could not be clearer about their intentions. They see Britain and the City of London as adversaries, not partners.”
The memo was originally published in the Mail on Sunday.
Last week, Chancellor of the Exchequer Rishi Sunak hailed the potential for a “Big Bang 2.0” in the City of London after Brexit as he hinted that the Government is ready to slash red tape.
Chancellor of the Exchequer Rishi Sunak
The Chancellor raised the prospect of a Margaret Thatcher-style surge for the City.
He stressed that while equivalence and other elements were important, his main focus would be to make sure the Square Mile “remains the most dynamic place to do financial services anywhere in the world”.
In an interview with City AM, Mr Sunak said “there are many things in the deal that are good for financial services”.
He cited the free flow of data, business travel, and agreements on legal and professional services – as well as suggesting a deal on regulation will be done soon.
Mr Sunak told the publication: “There is strong language on future regulatory cooperation, and putting in place a Memorandum of Understanding in reasonably short order to have that structured regulatory dialogue.
“And there’s a forum for future equivalence decisions as well. That’s a positive.
“But regardless of all that, I think it’s important that we get on and make sure that the City of London remains the most dynamic place to do financial services anywhere in the world.”
Referring to Brexit enthusiasts who claim that the City can now enjoy another Eighties’ style leap forward, Mr Sunak said they “make a really, really good point”, adding that people were free to “call it Big Bang 2.0 or whatever”.
He added: “If you look at the history of the City stretching even further back than that, it has always constantly innovated, adapted and evolved to changing circumstances and thrived and prospered as a result. And I think it will continue to do that.”
Mr Sunak said the Treasury would “play a role in that, and all the businesses and the people involved will help us do that”.
However, the Chancellor also played down the need for fundamental change in the City, pointing to its natural advantages and the “culture and creativity of our people”.
He noted: “Regulation is important, of course, as is timezone, as is language. All of those things are important.”