Soon London will need a justification for its euro clearing monopoly

London – If ‘leave means leave’ and, as the majority of British people have been persuaded, Brexit is starting a bright new path towards their full independence, why the UK, and the City of London, still operates more than 90% of all cleared swaps in euros?

From an EU perspective there is no reason why a country not in the eurozone and exiting the EU should have this privilege which secures hundred of thousands of jobs and contributes significantly to the UK GDP and circulation of money within the country. This privilege, which is in fact a right, should be reckoned primarily to one or more of the 19 eurozone countries or at least to one or more of other 27 countries contributing to the European Central Bank.

Germany, France, Italy and Spain are the first four by capital contribution to ECB

Deutsche Bundesbank (Germany)  1,988,229,048.48 bln

Banque de France (France)  1,537,811,329.32 bln

Banca d’Italia (Italy)   1,277,599,809.38  bln

Banco de España (Spain) 902,708,164.54  mln


Bank of England, which regulates clearing houses in the UK, might argue being itself first among non-euro area contributions to the ECB’s capital with 58,200,921.14 euros. But if contributions would be a parameter for the future, Britain could not jump the queue of other 12 countries, which are both in the eurozone and EU members.

ecb r                 Photo Copyright © European Central Bank

A  confirmation of the fact that the UK after Brexit should, and will sooner or later, lose this privilege is provided by the European General Court ruling dated 4 March 2015: the UK Treasury won against the ECB after in a document published in 2011, ‘Eurosystem Oversight Policy Framework’, the European Central Bank sustained firms handling large euro transactions should be based in the eurozone area: “the infrastructures settling euro-denominated transactions should be legally incorporated in the euro area with full managerial and operational control and responsibility, over all core functions, exercised from within that area”.

But the Luxembourg Court ruled against the ECB because the Eurosystem Oversight Policy requires power of direct intervention in the regulation of Central counterparty clearing (CCP), activity: the EU General Court ruled that the “ECB lacks the competence necessary to regulate the activity of securities clearing systems as its competence is limited to payment systems alone by Article 127(2) of the Treaty on the Functioning of the European Union (TFEU)”.

But this verdict is valid until the UK remains in the EU.

After the verdict in 2015, HM Treasury’s lead lawyer on EU financial services strategy, Alexandria Carr of Mayer Brown law firm, said “This is not just a victory for the UK – she said – it is a victory for all those who believe in the internal market and equal treatment for all 28 EU Member States”, words that make clear the rule will no longer apply after Brexit.

We do believe in the internal market and equal treatment for all EU Member States as well, that’s why a country who ‘democratically’ decided to exit the EU and never entered the eurozone should not be allowed to profit from the clearing in euro.

One more support comes from the court debate itself as the UK argued that the ECB Eurosystem Oversight Policy Framework went against the EU single market and the free movement of goods, people, services and capital therefore could not be enforced. When the UK will exit the single market the doubt will be cleared as to whether one extra European country can argue anything about the single market and hold a position of monopoly on the clearing of transactions in euros.

EU members currently have around £69 trillion of contracts with UK clearing houses. Meanwhile the EU Commission is preparing a contingency plan in case of no deal Brexit where the UK clearing firms, currently regulated by the Bank of England, could continue operations, but after a transition period these would stop or move to the EU. But the question remains in case of a deal.

On the frontline for a regulation of trillions of euros in cross-border derivatives transactions, is France: Banque de France governor Francois Villeroy de Galhau opposes clearing in euro in UK without European Securities and Markets Authority (ESMA) controls and is in favour of moving clearing operations in the EU. Other Eurozone members expressed in Brussels their view of an increased regulation from nationals central banks rather than from ECB.

Whether a French/ECB centred solution or a more devolved one giving more power to each EU member’s watchdogs, the clearing needs a EU solution, this time not in the interests of banks, but for the people, citizens and workers of Europe,  regardless of deal or no deal.

@Emymuzzi