MAGGIE PAGANO: Good business must trump bad politics

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Bone of contention: Fighting over LCH’s spoils has become a battleground in the Brexit debacle as some EU politicians – mainly French and German – want to poach its business


This month marks ten years since the banking crisis. The world’s financial system has become a safer place in the meantime.

This is mainly because regulators have forced most new over-the-counter derivatives to be processed through clearing houses to maintain stability.

They were right to do so. Most contracts are now processed through such firms, which act as a circuit breaker by managing risk if firms default on interest payments.

The clearing of derivatives is one of the City’s great success stories. At the heart of the system is LCH, a subsidiary of the London Stock Exchange, which acts as a buyer to every seller and a seller to every buyer.

Bone of contention: Fighting over LCH’s spoils has become a battleground in the Brexit debacle as some EU politicians – mainly French and German – want to poach its business

Bone of contention: Fighting over LCH’s spoils has become a battleground in the Brexit debacle as some EU politicians – mainly French and German – want to poach its business

LCH’s numbers are mind-boggling. This year it has cleared interest-rate swaps with a notional value of $576 trillion on behalf of customers in 59 countries and in 20 different currencies.

Having such a vast global liquidity pool reduces costs, and analysts estimate that customers were saved $30billion in regulatory capital last year. 

Though most of LCH’s business is global, about 14 per cent of clearing is with an EU entity on either side of the trade, and half of that is in euro swaps. 

While this is a tiny part of its total, it accounts for the majority of euro-denominated clearing.

That’s why fighting over LCH’s spoils has become a battleground in the Brexit debacle as some EU politicians – mainly French and German – want to poach its business. 

Recent scare stories that LCH is losing some business to its German rival, Eurex, part of Deutsche Boerse, are misleading. It’s true that some customers have moved clearing to Frankfurt – mainly short-dated financial contracts. But it’s a small amount – about 8trillion euros this year.

The bigger and more lucrative part of the market is long-dated derivatives, which are still being cleared in London and are likely to continue to be because it is a more liquid market. Yet there is a greater worry. 

With only eight months to go until Brexit D-Day, it’s critical that the UK and the EU countries speed up their negotiations for all financial services companies.

It’s essential that UK and EU regulators and politicians bang heads together this autumn so that trillions of daily contracts can continue to be cleared smoothly from March next year.

They must provide the markets with a clear statement of mutual intent that business will continue as normal.

Waiting until next year would be too late: The markets need certainty and confidence now. Crashing out next March without some sort of reciprocal declaration would make the Lehman collapse look like a picnic.

Even the IMF has warned EU countries to be careful about what they wish for in stealing LCH business. 

They know that any further fragmentation of swap flows can only lead to a more fractured and less liquid pool – thus putting up the cost of capital for EU savers and investors.

It would be madness on the part of the French and the Germans to destroy a systemically solid market infrastructure to score political points. Good business should trump bad politics.

French takeover

Philip Hammond is not the sort to over-egg le pudding. So the Chancellor’s warning that Emmanuel Macron will do almost anything to persuade companies to jump ship from London to Paris should be worrying. 

Hammond says the French president is telling US and City firms that access to EU markets will be harder after Brexit.

Macron’s threat follows previous attempts to lure senior US bankers and tech geeks over the Channel with special tax breaks and new schools for expats. (Would that not be considered state-aid by EU rules?)

But we should not be too concerned: Macron’s seduction feels like deja vu. Successive French governments have been promising the same sorts of incentives for at least 30 years. 

They didn’t work then, and are unlikely to do so now – and London’s restaurants are better today than those in Paris.

 

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