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European financial centres have failed to make the most of the UK’s departure from the bloc by seizing business opportunities from the City of London. Hubs, such as Frankfurt and Paris, had hoped to attract investment managers after the City lost its automatic access to the EU’s financial services market. But European conceded they have failed to grow their businesses in the euro-denominated trades market.
The City controls the majority of the EU’s clearing business – independent parties that act as intermediaries in a trade and manage the risk if one side defaults, collecting fees on transactions.
Thousands of jobs and potentially tens of millions of pounds in increased costs are at stake if the market is forced to leave Britain.
Deutsche Boerse’s Eurex Clearing was considered one of the most likely candidates to take business from the London Stock Exchange’s LCH clearing division.
Its bosses, however, has said euro clearing had grown more slowly than forecast due to the coronavirus pandemic and delays in regulation changes.
They also said banks were reluctant to shift their business from London despite the continued uncertainty about the UK and EU’s future relationship.
Matthias Graulich, a board member at Eurex Clearing, said: “There is a slower growth path than we initially had expected for the second half of this year primary due to COVID-19 and its implications, but everything is going in the right direction to achieve our goals.”
Eurex said it accounts for €19trillion of the total market of euro derivatives and forward contracts market of €100trillion, with LCH holding the rest.
Mr Graulich said banks had put off plans to close swaps positions in London and reopen them in Frankfurt because of the disruption of traders working from home during the pandemic.
The LSE has claimed there is no noticeable shift in clearing from London.
Experts insist banks are not in a position to move from the City to European hubs voluntarily because of the costs and complexity of doing so while still faced by the challenge of COVID-19.
The European Commission has still not announced how long it will allow LCH’s clearing of euro swaps for EU customers to continue after Britain’s full access to the bloc ends in December.
Simon Gleeson, a financial services lawyer at Clifford Chance, said: “It’s very hard to see why the EU is playing around with a time limit because Catch 22 remains in full force with banks not moving positions unless ordered to.”
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For Britain to maintain access EU access for its financial services industry, the Bank of England will have to allow the bloc’s ESMA watchdog to jointly supervise LCH.
But the BoE has previously warned “multiple hands on the wheel” in a crisis would create confusion.
The Bank has called for clarity by the end of September at the latest to avoid market chaos.
Mr Graulich said the EU wants power over business like euro clearing and that the amounts of business cleared inside and outside the EU will affect decisions on access for Britain.
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“The EU needs to develop its own financial market eco-system with Brexit now ultimately happening. Taking a five to ten year perspective, it is success critical for the EU,” he said.
Tim Focas, of the Parliament Street think-tank, has called for both sides to reach an agreement to continue financial services trading.
Writing for City AM, he asked: “Can the UK Government really ignore warnings from Brussels that the EU may not be in a position to grant the UK access to European financial markets?
“Conversely, can the EU risk being without access to London’s financial infrastructure?
“The answer to both questions is an unequivocal no. The truth is that both sides should put the political point scoring to one side and look at the reality of the situation.”
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