Tuesday, 9 May 2017

Can the EU force Euro-Clearing to move away from London?

In short, yes and no.


This will be topical as the EU is due to announce this week what it thinks it can do. The key point is that if they rule that all Euro-Clearing has to happen in the EU , then major banks will have to comply and so will move their operations from London.


One key issue I see is that even though this is aimed squarely at London, it will have to apply to all global jurisdictions - so it is a massive act of protectionism. Thus, in part, it will undermine the Euro as a world reserve currency if you can only clear it in London.


The EU thought about this level of idiocy with the Financial Transaction Tax - an idea that they really wanted to do in Brussels, which has now entered the realms of no longer being discussed officially as we blogged about last year.


This will be because self-inflicted wounds are not such a great idea and are not popular either.


With Euro-Clearing they may argue that hundreds, maybe thousands of jobs will come from London (again, let's all pretend automation is not happening people and already 80% of trades are fully automated even to settling!). So it can be sold domestically to the EU as screwing the UK - fine for Germany and France - but what do Italy and Spain get except a less fungible currency? Why will they go for this just because Brussels wants to show off?


Surely the UK can offer incentives to keep this business (not regulatory oversight) in terms of lowering transaction costs.


To me this issue is a very important one to watch for Brexit as it sums up the key dilemma  - screw the UK for political reasons or do a deal for rational economic ones. I think it might be a bellwether for the negotiations as a whole.

18 comments:

John Miller said...

Yes, the EU will screw us on this and Spain and Italy will do as the Germans (and now France) will tell them to.

You're right, it will show the level of EU nose-cutting, which I think it will do, yea, even with a rusty blunt penknife.

Anonymous said...

It would be a good bellwether as it's so petty. Sure, we suffer from the same malady that politicians often look at things within their remit which can be done rather than should be done but one would think this would highlight the disconnect between the punters, the markets and their regulators. It's just so myopic. Hey ho, let the show go on and such!

DtP

Nick Drew said...

here's what we can envisage happening

(A) the EC / eurozone will 'repatriate' euro-clearing
(B) they will cock up the technicalities (and probably incorporate a TT at the same time)
(C) the City will respond with a new and cheaper service (prob derivative/shadow) that will scupper A
(D) the EC, enraged, will draft some demented piece of monster-legislation which would bring the whole game into disrepute and (inter alia) stymie european companies in day-to-day banking terms
(E) someone will have a word with them and it will all subside

E-K said...

JM - Nose cutting really hurts. They'll find out.

Anonymous said...

ND - let's hope so, but it's difficult to over-emphasise how very much of a political project the EU is. Look at the economic pain that Southern Europe has suffered - yet the Euro survives.


On the other hand if they go for cutting off both UK and EU noses there are a number of possibilities, not all of them cheerful

a) the Gina Millers, Guardian/BBC and the sleepers Blair's left in place Operation Gladio-style will do their best to act as a fifth column for Brussels - could make the post-Referendum fallout look like a picnic.

b) our Glorious Leader could blink - a non-negligible possibility, especially if scenario a) is in effect. Has she the heart and stomach to denounce the fifth column?

c) EU unpleasantness could however have the effect of putting people's backs up big-time - the numerical balance between the "we deserve it for voting Leave" crowd and the "sod off Brussels" crowd may well determine our leader's attitude.

Anonymous said...

BBC's anti-Corbyn agenda is remarkable (and I'm no fan). Asked whether he'd take the UK out even if the deal offered was awful, he declined the poison pill and said he's looking for a deal to protect jobs etc - pretty much par for the course.

Half an hour later it's 6 pm - headline "Corbyn refuses to say we'll leave if he wins".

Nick Drew said...

our Glorious Leader could blink - a non-negligible possibility

agreed, she shows every sign

th main hope is, the 27 dig themselves into such a pit of a negotiating stance, blinking is irrelevant (provided someone can forcibly restrain her from jumping in after them)

Edward B said...

Dollar protectionism led to a EuroDollar market. Won't Euro protectionism lead to a EnglishEuro market?

Charlie said...

Plenty of ways to take a EUR position without buying or selling any Euros. Would be quite easy for the City to sell NDFs just as we do for other non-deliverable currencies like the Chinese Yuan or Korean Won. If anything, it might make the City more attractive; only worrying about settling in USD or GBP will do very nicely, thank you, if you're a small firm trying to hedge your FX exposure.

It does amuse me that the Remainers think the City will just up sticks and go to the continent. I can imagine how short the conversation would be with 95% of my colleagues if they were told to move to Frankfurt, for instance. I can't help but think that a lot of the "we might need to move thousands of jobs" spouted by the big firms is aimed at setting the expectations of their own staff, who will be mighty relieved when only a few hundred end up having to tell the wife and kids that they need to pack their bags and move to a dull suburb of Madrid or Milan.

E-K said...

Charlie - They will go impoverished. Only the first 5% can sell up before a run on London property values.

Anonymous said...

Charlie: ""we might need to move thousands of jobs" spouted by the big firms is aimed at setting the expectations of their own staff,"

Banks and finance houses have been outsourcing to (a) the continent, and (b) India for at least fifteen years.

While I worked for an American bank ( fourteen or so years ), whole departments went wherever the cheapest labour 'this year' happened to be.

HSBC is always threatening to move to Hong Kong / China, well I doubt the executives would appreciate the way the Communist party of China enforces its banking regulations.

Or does Frankfurt want more banks with liabilities greater than Germany's GDP? They've already got enough on their plate with Deutsche and Commerz bank.

The big finance houses can move, if they can find anywhere to take them.


We've already been covering the losses of RBS, currently running at £6Bn per year and have been for the last ten years.

CityUnslicker said...

Great comments all. I think the English-Euro market maybe harder than I first thought, but some kind of NDF or shadow market will work no doubt.

when its politicians versus market we know who wins and who loses (the people lose, see Greece etc).

Anonymous said...

@ND - I'm not sure sure May will blink, since the EU adopted a stance of humiliating her shortly after becoming PM, and Juncker's leaking, she appears to be a pretty vindictive character. She's looks to have gone from being a Remainer to a Soft Brexiter to a fervent anti-EU, not for political reasons, but because the EU cannot stop itself from acting childishly.

@EK - The bankers don't need to sell, renting out in London will pay the mortgage as well as partially fund rent/mortgage elsewhere. I'm rather glad I'm in the north, I get a lot more bang for my buck, and the only gangs I have to tackle on a daily basis are the geese looking after the goslings, and the ducks wanting more seeds, and I have two large cities under an hour away.

andrew said...

Anon, who do you think they will be renting to....

E-K said...

Andrew - As well as that will be extreme property ramping, Frankfurt, Paris...

Charlie said...

Anon: "Banks and finance houses have been outsourcing to (a) the continent, and (b) India for at least fifteen years."

Yeah but only bits of ops, dev and QA stuff. None of the actual money-making happens in India or SEA. You can only outsource to places that have labour markets with the required skills mix and it's becoming apparent that outsourcing isn't such great value after all. You have to employ three times as many staff and, after a bit, their pay demand is such that jobs get repatriated. That's definitely happening right now, particularly with the fall in sterling.

Anotheranon: "The bankers don't need to sell, renting out in London will pay the mortgage"

I don't think anyone's going anywhere in numbers, but if they did, who's going to pay that rent? Ridiculous London rents are predicated on the high salaries paid by the banks.

Quite a few forriners at my place sold up (mainly "premium" flats in Canary Wharf and out west) earlier this year when it became apparent that prices are heading down and sterling's going nowhere.

Anonymous said...

@Andrew and Charlie - there are more than bankers in London. I've met a lot of people who live in the city, none who are bankers (mostly legal, and not financial legal either), and who own/rent. And this is before we get to the Airbnb market, which can be far more profitable than being a landlord (San Francisco was an eye opener in that regard)


I could a small dip or a slower increase, but a collapse?

Anonymous said...

I see the critics of Jeremy Corbyn's more even-handed approach to Palestine vs Israel have leaked the manifesto. For them, the true nightmare would be a Labour victory and a Prime Minister with the wrong views on that neck of the woods. I don't think he'd win even with whole-hearted internal Party support, but I guess the idea is pour encourager les autres.

"Nice little political career you've got. Be a shame if something happened to it."