Monday, 16 January 2017

Euro Clearing and Brexit - The Practitioners' View

Today the FSNForum publishes its second research piece, considering the EU’s proposal that the clearing of euro-denominated products should be restricted to the Eurozone.

The paper suggests why it could be in the best interests of the EU for clearing of these products to continue outside the Eurozone and highlights 4 key findings:

  1. The euro’s position as a global reserve currency could be significantly diminished by any restriction of euro-clearing, which could also result in an offshore market in euros, akin to the Eurodollar market.   Restricting its clearing to the Eurozone may also revive an opposing message, that of “fortress Europe”, which risks precipitating an international “tit-for-tat” response.
  2. The decision may not effectively counter the clearing based systemic risk concerns of the ECB, already confronting similar issues within the Eurozone, since it may give rise to very significant other such risks, affecting central banks in their supervision of clearing houses, as well as negatively impact market liquidity, participation, access and cost for clearing firms, and end users across Europe and globally.
  3. The UK can signal its commitment to a close and supportive relationship with the EU in future by offering the ECB an oversight framework, similar to that currently employed between the UK and US.
  4. Such an approach would satisfy the main concerns of the ECB while maintaining the euro’s position as a reserve currency, minimising the impact on systemic risk for the Eurosystem and keeping costs low for EU governments, corporates and individuals

Anthony Belchambers, Chairman of the Honorary Advisory Council of the FSNForum said: “The EU should not rush to make a decision on this topic as a political backlash to Brexit.  Yes, the ECB's systemic risk concerns, following the global financial crisis, are understandable, but relocation of euro-clearing to the Eurozone also carries potential risks for market economics and the international standing of the euro. The European Commission should therefore first carry out a full impact analysis of the consequences of relocation and consult widely with the market, but the British Government must also consider how it can otherwise accommodate the ECB's concerns"

Daniel Hodson, Chairman of the FSNForum’s Executive Committee, added: “The Forum's approach draws on the views of those less widely heard - professional market participants and end users. International financial markets served by clearing directly determine the cost of borrowing and managing money for governments, corporates and private individuals throughout the globe, and not just in Europe. Our report demonstrates that restricting euro-clearing could adversely affect anyone anywhere who, for instance, pays taxes and/or has a bank loan or deposit or a pension plan”

The Financial Services Negotiation Forum (FSNForum) launched in October 2016 and brings together former supporters from both the leave and remain sides of the referendum debate. In the course of producing this paper the FSNForum invited submissions from practitioners and policymakers before hosting a practitioner roundtable.  The resulting draft was circulated to members for comment and liaison with key market stakeholders, such as the clearing houses and counterparties, has been maintain throughout the process.

Click here to download the full report.