London Won’t Easily Surrender Role as Euro Clearinghouse, Hammond Says

Chancellor of the Exchequer says the City should keep the business after Brexit

The Wall Street Journal

By INYOUNG HWANG
Oct. 6, 2016 1:37 p.m. ET


The City of London won’t quietly relinquish its central role in derivatives trading even after the U.K. completes its exit from the European Union, a British official said Thursday.

Philip Hammond, the chancellor of the Exchequer, said firms in London will continue to handle transactions on euro-denominated derivatives. The location of clearing, in which funds are transferred from one account to another, and of settlement, in which financial institutions agree on account balances, has emerged as a key issue in Britain’s departure from the bloc.

London is home to some of the region’s biggest clearinghouses, which are intermediaries that stand between buyers and sellers of financial instruments and act as a buffer should one side fail to hold up its obligation. A threat to the clearing and settlement business could strike at the heart of the city’s large financial industry.



A former senior Bank of England official has said the City financial district is “certain” to lose the euro clearing business, and French President François Hollande said London should no longer be the hub for euro-denominated clearing. But Mr. Hammond said London will remain a center for such trading.

“It’s by no means clear 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 eurozone,” said Mr. Hammond in an interview John Micklethwait, editor in chief at Bloomberg News. “There will still be a number of companies who do not use the euro currency, who are inside the European Union, who are entitled to the protections of the single market.”

Mr. Hammond is on a trip to New York to reassure U.S. banks that he will negotiate good access to the EU. His visit comes in a week in which the pound has tumbled after Prime Minister Theresa May indicated that maintaining the Britain’s privileged access to the country’s largest trading partner was a lower priority than controlling immigration.

The City dominates the field of euro-denominated derivatives trades. Of the $9.4 trillion in daily global derivatives trades tracked by the Bank for International Settlements, about 43% take place in the U.K.

In July, the U.K. won a small reprieve when the financial services chief of the European Commission said the EU probably wouldn’t move quickly to strip London of the business.

The European Central Bank has tried before to transfer clearing for euro-denominated trades in the eurozone; last year, the British government won a legal case to block the ECB from doing it.

“If the ECB was to try again to dictate how euro-denominated clearing took place, that would be a legal process. It would take time and it’d be somewhere down the road,” Mr. Hammond said Thursday.