EU Accord Essential For London To Retain Position As Clearing Hub

The recent Brexit vote has resulted in widespread uncertainty, with politicians and government officials still struggling to develop a plan of action for managing issues around market access, labour movement, and trade dealings between the European Union (EU) and Britain.

Francois Villeroy de Galhau, the Governor for the Bank of France who is also a key member of the European Central Bank’s Governing Council has said that United Kingdom would need to enter into new economic agreement with the EU if it wants to continue carrying out euro-denominated financial transactions.

In a statement Francois Villeroy de Galhau said

It is desirable that a new European agreement with Britain is achieved. If there is no such accord, there will be no more passport for the City and the clearing houses will not be kept

He was speaking at the Rencontres Economiques conference which was held last week in France’s Aix-en- Provence. Benoît Coeuré, an executive board member at the European Central Bank also spoke at the same conference and stated that it was too early to decide how the ECB’s would respond to the Brexit given the general uncertainty prevailing within Britain.

Possessing an EU passport enables companies to freely operate without regulation across the EU provided they are headquartered in one of the EU member countries. Currently many organizations that operate from London take advantage of this, but the recent vote to exit the EU could result in companies moving out of London to maintain this free access.

The Brexit vote will require a fresh discussion on the terms that would govern the agreement for Britain to retain access to the trade barrier-free single EU market. Officials in the EU believe that for Britain to continue to have market access, it must agree to market regulations and freedom of movement for workers.

London currently plays a vital role in the clearing of derivatives trades valued at around $493 trillion. With the vote to exit the EU, this has now come under question. EU courts have previously disallowed the ECB from bringing clearing transactions within its control by moving it to a euro area country.

Clearing houses have become a vital link between buyer and sellers, offering protection from default by holding collateral from both. The practice was adopted after the financial crisis in 2008 when the crash of Lehman Brothers almost caused a breakdown of the system.

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