The UK’s decision to leave the EU could come with significant risks and adverse consequences. The decision to opt out of the EU has raised some concerns and questions over whether or not the euro-dominated clearing house should still be operating in London. The LCH.Clearnet (London clearing house Clearnet) is Europe’s largest clearing house for euro-denominated securities, is responsible for clearing and acts as the facilitator of exchanging multiple asset classes, including equities, derivatives and various other securities.
The Different Currencies Issue
Many governments around Europe have allowed most of their currency denominated instruments to be traded and cleared in London. This is in part because English law is widely accepted throughout most of Europe. However, French president Francois Hollande strongly argues that it would not make any logical sense for the clearing house that deals with euro transactions to be based in a city that will no longer be in the EU. It would mean that the ECB will not be able to closely supervise the clearing house which could pose a major risk.
The LCH.Clearnet is predominantly owned (just over 57%) by the London Stock Exchange Group (LSE). Post trade and risk management are at the core of the LSE’s business operations. The LSE clears more than half of all interest rate swaps globally and moving the LCH in which the LSE is the majority stakeholder will be an extremely difficult procedure, due to the extremely complex legal implications.
This idea is corroborated by Xavier Rolet, the CEO of the LSE group, who explains that it will be impossible to separate the clearing house by currency. He argues that the LCH cleared over $328trn worth of securities in 2015 in 18 different currencies. He goes on to say that it would be “hard, if not impossible” to separate the transactions made in euros to those made in pounds, dollars and other currencies.
Destination: New York?
The consequences of the LCH moving out of London could be dire. 100,000 jobs across the UK could be in danger, and this includes jobs in risk management, compliance, middle office and back office. Frankfurt and Paris have their eyes set on the lucrative clearing market, but Rolet argues that the most likely destination would be New York, as it would be the only other financial centre with the capabilities to accommodate such a business.
A planned merger Between Germany’s Deutsche Boerse and the London Stock Exchange could be on its way. This is not the first time a company has made a hostile bid for the LSE, and it is also not the first time Deutsche Boerse has tried to merge with the LSE either. They have made several attempts, in 2000 and 2004, for £808m and £1.35bn respectively.
Is A Merger The Best Way Forward?
Australia’s leading bank, Macquarie, has also made several failed attempts to acquire the LSE, failing to sway shareholders into supporting the bid. LSE’s merger with Borsa (Italy’s main stock exchange) in 2007, however, turned out to be successful.
Together, the exchanges are known as the LSE Group. If a merger with Deutsche Boerse goes through and is complete, it would become the biggest exchange house in Europe by far.
At this stage, shareholders have been informed of the potential merger and have expressed their approval. If the two were to merge this could mean that more of the euro based trades could take place in Frankfurt rather than London. In essence, it could mean that some operations currently done in London may be moved to Frankfurt.