Written By Brexit is making an impact on London’s financial sector. On June 4th, the European Commission (EC) demanded that London share a portion of its derivatives clearing operations with the Brussels-based Euroclear. This follows years of debate over who will “win” the lucrative business of handling derivative transactions. What does this mean for London’s financial hub? In this blog post, we will discuss the implications of Brussels’ demand and how it could potentially shape the future of Britain’s financial sector. We will also provide suggestions on how to prepare your business for any changes that come as a result of this decision.
What are Derivatives?
Derivatives are financial instruments whose value is derived from an underlying asset. The most common types of derivatives are futures, options, and swaps.
Futures are contracts to buy or sell an asset at a future date for a predetermined price. Options give the holder the right, but not the obligation, to buy or sell an asset at a future date for a predetermined price. Swaps are agreements to exchange one asset for another at a future date.
Derivatives are used to hedge risk, speculate on price movements, and for other purposes. For example, a company that is worried about the possibility of rising interest rates may enter into a swap agreement in which it agrees to exchange its variable-rate debt for fixed-rate debt at some point in the future.
The size of the global derivatives market is estimated to be $700 trillion. That’s more than ten times the size of the entire world economy! Most of this activity takes place in London, which is why Brussels is now demanding a share of the action.
What is Clearing?
When financial institutions trade derivatives, they often do so through a clearing house. A clearing house acts as a third party between two parties in a financial transaction, ensuring that the trade is settled properly.
The European Union is now demanding that a greater share of London’s derivative clearing business be done in EU-based clearing houses, instead of the current arrangement where most of it is cleared in London. This could have far-reaching consequences for the City of London, which has long been one of the world’s leading financial centers.
There are a number of reasons why the EU is making this demand. One is that London-based clearing houses handle a large amount of euro-denominated transactions, and the EU wants to make sure that these transactions are cleared within its borders. Another reason is that some EU policymakers believe that having more derivative clearing business done in EU-based institutions would reduce systemic risk in the event of another financial crisis.
The UK government has said that it will oppose any attempt by the EU to forceLondon-based clearing houses to relocate to other parts of the bloc. The UK’s Chancellor of the Exchequer, Philip Hammond, has warned that such a move could fragment global financial markets and lead to higher costs for businesses and consumers.
It remains to be seen how this standoff between the UK and the EU will play out. But one thing is certain: the outcome could have major implications for both London’s role as a financial center and for Europe
What is the Significance of Brussels Making this Demand?
As the European Union’s capital, Brussels has a lot of sway when it comes to financial regulation. So when the EU decided to demand a share of London’s derivatives clearing business, it sent a clear signal that it was not happy with the status quo.
The reason for this demand is simple: London currently dominates the global derivatives market, and the EU wants a piece of that pie. Derivatives are financial instruments that are used to hedge against risk or speculate on future price movements. They’re often complex and expensive to trade, so they’re typically cleared through central clearinghouses.
London is home to the two largest clearinghouses in the world, LCH Clearnet and ICE Clear Europe. Together, they handle over 90% of global derivatives trading. This gives London a huge advantage over other financial centers like New York or Frankfurt.
The EU wants to level the playing field by requiring London-based clearinghouses to share some of their business with European rivals. This would reduce London’s dominance of the market and make it more fair for other cities to compete.
It’s still unclear how this demand will play out, but it could have big implications for the City of London. If London loses its grip on the derivatives market, it could lose its status as a global financial center.
How Will This Affect London’s Economy?
London has been the world’s leading financial centre for derivatives clearing – a process whereby banks and other financial institutions trade contracts to manage their risks – since the 1980s. But now, Brussels is demanding a share of the action.
The European Commission wants London-based clearing houses to relocate some of their operations to the EU after Brexit, in order to “reduce the risks posed by Britain’s departure from the bloc”.
This would be a huge blow to London’s economy, which relies heavily on the City’s status as a global financial hub. Clearing houses play a vital role in ensuring the stability of financial markets, and London is home to two of the world’s largest – LCH Clearnet and ICE Clear Europe.
If these businesses were forced to relocate, it would mean job losses and less money flowing into the capital. This would have a ripple effect on other businesses and industries across the city, and could ultimately lead to a slowdown in economic growth.
What Does this Mean for the Future of the City?
The Brussels-based European Union (EU) is demanding a share of London’s lucrative derivatives clearing business, a key component of the City’s financial services sector. This comes as the UK prepares to leave the EU, and could have major implications for the future of London as a financial center.
Clearing houses act as middlemen between buyers and sellers of financial contracts, ensuring that trades are settled properly and reducing risk for both parties. The EU is now seeking to attract more business from London-based firms by offering lower taxes and regulations.
This could lead to a significant loss of revenue for the City of London, which has long been considered one of the world’s leading financial centers. The UK government has so far refused to give in to Brussels’ demands, but it remains to be seen how long this will continue. If London loses its status as a global financial hub, it could have devastating consequences for the entire country.
Conclusion
It is clear that the demand from Brussels for a share of London’s derivatives clearing market could have major implications for the City. This could be far-reaching, with potential changes to the way the industry works and even the relocation of some clearing houses to other European cities. It remains to be seen how this situation will develop, but it is certainly something worth watching closely in order to understand what it may mean for those in financial services sector.
