It was one of London’s biggest European court victories. Last year, the British capital dodged a bullet when the European Court of Justice stopped banks from having to transfer jobs to the euro zone for a vital part of their business.
The judges ruled that large transactions in euro-denominated securities didn’t have to be handled within the euro zone, as the European Central Bank has demanded, even though Britain has never joined the 18-nation currency bloc.
Under the ruling, so-called “euro clearing” — an extremely important market for Europe’s financial capital — was allowed to remain in London.
The ruling’s logic was simple: Being a member of the European Union was enough for London to keep its place as a European financial capital. The ECB was overstepping its authority by forcing a shift.
With Brexit, all bets are off.
“The big question is whether the loss of euro clearing might set off a chain reaction, and also cause the departure from London of bank employees responsible for transactions denominated in U.S. dollars.”
After Britain’s vote in June to leave the European Union, banking industry sources believe the ECB will now finally get its way and bring euro clearing to the euro zone.
“We won’t have the same luck again,” said one British banker who works for a foreign financial institution. “As soon as this seems likely, banks will shift activities and employees from London to the continent.”
The reason is simple: Until now, financial firms based in London have been able to do all the business they needed to do in the euro area – even if Britain isn’t a member. If that changes, so does the motivation for staying in London.
The fact that euro clearing can be handled in London is one of the key reasons the British capital is so attractive to foreign banks, like those from the United States. Other factors include that they can access the European single market and have so-called “passport rights,” which allow them to set up shop in London but still deal with customers in the remaining 27 nations of the European Union.
With Brexit, all of these benefits are under threat. Various banks have been busy preparing contingency plans in case they lose these advantages as a result of the Brexit referendum.
Some bankers predict these plans could be implemented quicker than expected.
“If the ECB signals its intention to withdraw euro clearing from London, that will be a wake-up call for banks to transfer operations to the continent,” said Graham Bishop, a former banker.
Mr. Bishop now works as a consultant on European integration. He’s also part of a new organization the British finance industry has set up to advise the government in its Brexit negotiations with the European Union. He said he fears additional consequences ahead.
“The big question is whether the loss of euro clearing might set off a chain reaction, and also cause the departure from London of bank employees responsible for transactions denominated in U.S. dollars,” he said.
In its decision in favor of London in early 2015, the European Court of Justice ruled on formal grounds. The judges believed the ECB had overstepped its authority by demanding that large transactions involving securities denominated in euros be handled in the euro zone.
The current view in London is that the ECB could now easily be assigned the authority it needs. After Brexit, Britain would no longer have a voice in the European Union and couldn’t prevent the move.
Experts such as Charles Bean, formerly deputy head of the Bank of England, consider it a done deal.
“I wouldn’t say it’s probable that we’ll lose euro clearing. I’d say it’s certain,” he said in a recent appearance before members of parliament.
It would be a major blow: London is currently the most important trading platform for transactions in euros.
Three quarters of euro-denominated derivatives transactions are handled on the island, according to the Bank for International Settlements. In France, the share is 13 percent and in Germany, 2 percent.
On an average day, London clearinghouses conduct commercial transactions with a volume of more than $570 billion.
The largest clearing house for derivatives is LCH, which has its headquarters in the British capital. It is a subsidiary of the London Stock Exchange, which wants to merge with Deutsche Börse but has also been thwarted by Brexit.
Experts say the clearing houses have some 700 employees themselves. There are also more than 1,000 clearing jobs at London banks.
Since the financial crisis, clearing houses have increased in importance. They not only handle transactions between two commercial partners, but also take on the risks that could ensue.
That makes them key components of the broader financial system, and was part of the original argument of the ECB in its call for euro clearing to take place in the euro zone. It argued that because clearing houses are subject to both credit and liquidity risks, problems there could lead to systemic crises and needed to be monitored by the euro zone’s central bank.
Back then, Britain countered with another argument: A shift of location made under duress violated the free movement of capital within the European Union. While the European Court of Justice didn’t take up that argument, it ruled simply that the ECB was exceeding its mandate.
But some British politicians realized at the time that London might not be so fortunate a second time.
“Outside the European Union,” Liberal Democrat Catherine Bearder predicted, “the United Kingdom couldn’t file a complaint and achieve this result.”
Katharina Slodczyk leads financial coverage for Handelsblatt out of London. To contact the author: firstname.lastname@example.org