(Bloomberg) -- Clearing has become a pawn in the post-Brexit battle for London's financial services industry, but U.K. Chancellor of the Exchequer Philip Hammond says it may not necessarily be up for grabs after all.
Most interest-rate swaps trading and clearing in the euro currency takes place in the U.K., a feature that for years has made the European Central Bank uneasy. Hammond's predecessor, George Osborne, fought a legal battle to protect that business and won. The battle for London's $570 billion of daily euro derivatives trading was reawakened after Britons voted in June to leave the European Union.
“If the ECB was minded to try its hand, as it were, to try again, to dictate how euro-denominated clearing takes place, that would be a legal process that would take time,” Hammond said today in a Bloomberg Television interview in New York. “I think that's some way down the line.”
Officials in France and Germany have targeted euro clearing as an industry that belongs in the bloc. Global bank executives are taking that threat seriously and are making plans to deal with the fallout.
It could be legally difficult for the ECB to strip clearing from the U.K. without discriminating against some EU members, Hammond said in the interview during his first trip to New York's Wall Street as finance minister. He noted that other EU countries also clear euro derivatives, and they're entitled to single-market protections. For example, euro interest-rate swaps are traded in Sweden, which is part of the EU but doesn't use the common currency.
“It's by no means clear to me that the rules of the single market, even after Britain has left, would permit the ECB to require euro-denominated instruments to be cleared inside the euro zone,” Hammond said.
Clearinghouses are designed to prevent a default from spiraling out of control -- they act as a firewall by holding collateral and monitoring risks. Regulators see them as one of the best ways to prevent another financial crisis, and so their role in global finance has become far more entrenched in recent years.
London Stock Exchange Group Plc is the majority owner of LCH, the world's largest clearinghouse for over-the-counter derivatives linked to interest rates. CEO Xavier Rolet said earlier this month that 100,000 U.K. jobs would be at risk if clearing leaves the country. About 700 people are directly employed in London's clearinghouses, including more than 500 at LCH.
The chancellor was seeking to calm nerves among businesses and bankers after Prime Minister Theresa May used her Conservative Party's annual conference this week to attack “international elites” and pledged to make capitalism fairer for workers.
--With assistance from Gavin Finch To contact the reporters on this story: John Detrixhe in London at jdetrixhe1@bloomberg.net, John Micklethwait in New York at micklethwait@bloomberg.net. To contact the editors responsible for this story: Trista Kelley at tkelley2@bloomberg.net, Michael J. Moore
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