LONDON – The Bank of England continues to warn about possible post-Brexit risks to the stability of the UK’s economy.
The bank published the record of its latest Financial Policy Committee meeting on Tuesday and both clearing and Brexit were high on the agenda.
The FPC – which is tasked with ensuring financial stability in the UK – said that there are “significant risks from disruption to cross-border clearing activity between the UK and EU.”
“The United Kingdom was an important global hub for central clearing activity and there remained significant risks from disruption to cross-border clearing activity between the UK and EU,” the report notes. “Central counterparties (CCPs) located in the United Kingdom provided important services to EU clients across a range of markets.”
Clearing houses such as LCH and ICE Clear Europe in London manage credit risk, acting as a middle-man in swaps and derivatives trades to guarantee the contract in the event that one of the parties involved in the trade goes bust. They have grown in importance since the financial crisis as they are meant to limit systematic risk. Around 70% of euro-denominated trades worth €930 billion (£820 billion) a day pass through London, according to a House of Lords report.
The location of euro-denominated trade clearing has been a hot topic since the euro first entered circulation in the late 1990s. European policymakers have argued that euro clearing should take place within the euro area. Britain has repeatedly had to defend its right to clear euro trades, given that it does not have the euro. Years of disputes culminated in a legal battle in 2015, which the UK ultimately won.
However, Brexit has provided fresh impetus for those seeking to move clearing out of London. The ECB proposed a change to its statutes that would give it “a clear legal competence in the area of central clearing,” back in June.
Those proposals, the Bank of England’s FPC noted, “could be used to deny EU firms access to ‘substantially systemically important CCPs’ unless they were located within the EU.” This would be worrying news for both Britain and the EU, the bank noted.
“In the event of access restrictions in those markets, EU firms would therefore have to move their activity to another CCP, which was likely to be difficult to achieve before the point of EU withdrawal. So there remained a substantial risk of disruption of cross-border clearing activity.”
Disrupting cross-border clearing would be “in no one’s economic interests,” BoE Governor Mark Carney said in a speech earlier in the year.
“Fragmentation of such global markets by jurisdiction or currency would reduce the benefits of central clearing,” Carney said at the City of London’s Mansion House in June.