A vital part of the City of London supporting tens of thousands of jobs has been spared the worst effects of a cliff-edge Brexit after European regulators recognised clearing houses, which process trillions of pounds worth of transactions each year.
London’s three main clearing houses, LCH, ICE Clear Europe and LME Clear, have been recognised by the European Securities and Markets Authority (Esma), just 39 days before the UK is set to leave the EU – with or without a deal.
The three companies process deals in commodities, securities and derivatives and underpin London’s dominance in the European clearing business.
Paris, Frankfurt and other European financial hubs hope to prise much of that lucrative business away from London after Brexit.
But Esma said recognising London’s clearing houses for twelve months after Brexit would “limit the risk of disruption in central clearing and to avoid any negative impact on the financial stability of the EU”.
Miles Celic, chief executive of lobbying group The City UK, said: “These permissions for clearing are a helpful step forward, but they are only a partial and temporary fix.
“Time is running out to resolve these technical issues, and while such temporary fixes are essential, long-term stable solutions are needed to provide the certainty that customers and clients across the whole of Europe and beyond need.”
A report for the London Stock Exchange in 2016 found that up to 83,000 jobs related to clearing could be lost in a worst-case Brexit scenario.
The European Commission put forward proposals in 2017 which would impose stricter supervision of clearing houses by EU central banks and Esma, and in some cases force bigger organisations to move operations to the bloc.
However, moving euro clearing would be costly and complex which experts predicted would make transactions more expensive and the financial system less safe.
Clearing houses are a crucial part of the “plumbing” of the financial system. They act as middleman between buyers and sellers of derivatives – financial contracts tied to the underlying value of a share, index, currency or bond.
Buyers and sellers deal with the clearing house rather than each other, absorbing losses if one counterparty fails to pay up.
This helps to prevent a domino effect of losses spreading through the financial system when one company defaults.
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