The fight for one of London’s biggest businesses is underway.
The city acts as a go-between for buyers and sellers of financial products priced in euros that play a vital role in Europe’s economy. The volume flowing through London is enormous: About $1.5 trillion is traded each day, or about 75% of all such transactions.
The European Central Bank has long argued that the activity should take place inside the group of 19 countries that use the currency. Now that the U.K. has decided to leave the European Union, the knives are really out.
London is home to massive clearing houses that facilitate the trade of these products. The largest is London Clearing House, which is controlled by the London Stock Exchange Group. Their business, which helps keep financial markets functioning properly, is called “euro clearing.”
Here’s the problem: Britain has never adopted the euro, choosing instead to stick with the pound.
That’s always created friction, with the ECB arguing that the arrangement constitutes a huge risk that endangers the overall financial system.
“The clearing houses’ location was a highly contentious issue long before Brexit,” said Uuriintuya Batsaikhan of Bruegel, a think tank. “Now that the U.K. wants to leave the EU, it is not going to quiet down.”
As long as Britain remained in the EU, the central bank wasn’t able to force London to drop the business. But now Britain is set to ditch the EU, all bets are off.
“When you think about it, it’s as if the majority of dollar trades was cleared outside the U.S., that would be problematic,” Batsaikhan said.
Valdis Dombrovskis, the EU’s top financial services official, hinted at potential changes in a speech on Thursday.
He outlined two scenarios. Britain could allow the EU to closely regulate its markets — even after it leaves the EU — an option that is unlikely to find favor with the government of Prime Minister Theresa May. She has said that Britain will no longer be subject to the European Court of Justice.
Dombrovskis said the EU could also simply require the business to move to a country located within the EU.
That would mean that a new set of clearing houses elsewhere in Europe would need to scale up to handle the huge volume of stocks and bonds, as well as financial products based on interest rates and currencies, that are included in the euro clearing business.
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The real damage to London could stem from the jobs that would disappear if the clearing operations are forced to move.
While the number of people employed directly by the four clearing houses that handle the majority of transactions only numbers in the hundreds, the supporting infrastructure is massive.
The head of the London Stock Exchange, Xavier Rolet, told Bloomberg in September that a minimum of 100,000 jobs at banks and other financial institution would be at risk if euro clearing left the city.
The U.K. is lobbying hard to keep the clearing operations in London. Its main argument is that moving the hub could cause havoc.
“A forced relocation of euro clearing would lead to disruption, uncertainty and fragmentation of the market,” said Miles Celic, the CEO of TheCityUK, a lobby group.
The London Stock Exchange Group said it would “continue to highlight the benefits of the current open, efficient and systemically safe clearing environment.”