The UK will need to come to a new economic agreement with the European Union it has voted to leave if it is to retain the business of clearing euro-denominated financial transactions, a member of the European Central Bank’s Governing Council said.
“It is desirable that a new European agreement with Britain is achieved,” Bank of France governor Francois Villeroy de Galhau said at the Rencontres Economiques conference in Aix-en-Provence, France, yesterday. “If there is no such accord, there will be no more passport for the City and the clearing houses will not be kept” there, he added.
EU officials have said repeatedly that freedom of movement for workers and adhering to market regulations are conditions for access to the single market. The negotiations may determine where clearing will fit in the UK’s future financial relationship with the EU, one of the officials said.
London’s role in clearing trades in the $493tn derivatives market has returned as an issue since Britain voted June 23 to exit the 28-nation EU. EU courts had previous blocked an ECB effort to bring clearing under its regulatory control by shifting it to a euro-area country.
Clearinghouses were embraced by regulators after the 2008 financial crisis, when the collapse of Lehman Brothers Holdings threatened to bring down other institutions. Clearing firms stand between buyers and sellers, holding collateral from both, in case a member defaults. Big trading companies are increasingly required to use them.
The $384tn of interest-rate swaps in circulation make up the largest slice of the off-exchange derivatives market. In euros, about 70% of trading in that kind of swap takes place in the UK, compared with 11% in France and about 7% in Germany, according to Bank for International Settlements data from 2013, the most recent data available. The US traded 2%.
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