French President Francois Hollande, speaking at a summit of EU leaders, said that the city of London will no longer be able to carry out the clearing settlement of transactions in euros. “The city that thanks to the EU could carry out clearing operations in the Eurozone will no longer be able to do this… It can serve as an example to all who yearn for the end of Europe”, — quotes the words of the President of the newspaper Financial Times.
Hollande at the summit also said that the results of the vote for the Brexit shows that Britain turned away from the principle of free movement of people, reports Bloomberg. Refusing the role of one of the key pillars of the EU, you lose the advantages that come with this, added the French leader. “Now it [the UK] will lose access to the single market,” said Francois Hollande.
“For the UK as a whole and owned by the LSE company LCH (clearing company LSE) the prohibition on the conduct of settlement of transactions with derivatives denominated in the Euro would be a painful blow,” wrote in response to a question the Vice-President of “Opening Capital” Grigory Kozin, responsible for trading operations in London. According to him, now the share of the UK accounts for up to 50% of the volume of transactions of OTC interest rate swaps. Clearing of interest rate swaps is one of the main businesses for the LSE, wrote earlier, the Bank UBS. LCH Clearnet calculates 95% traded in the world interest rate swaps with a turnover of more than $1 trillion.
According to Bank for International Settlements, at the end of last year, the volume of the whole derivatives market was $493 trillion. Of these, 30%, or $146 trillion, accounted for transactions denominated in euros. As for London city, they cover almost 70% of the operations with interest rate swaps, denominated in the single European currency. The total amount of interest rate swaps amounted to the end of last year, almost $384 trillion, a third of which is in euros.
Kozin recalled that after the 2008 crisis, regulators have begun to tighten requirements calculations for OTC derivatives. In particular, the European regulation EMIR (European Market Infrastructure Regulation) requires that settlement of transactions in OTC derivatives was held through a Central counterparty, which acts as a clearing house. “On the instruments, the calculations which do not pass through a Central counterparty, there are additional measures to minimize the risk of counterparty default, which makes the settlement of such tools are much more expensive,” says Kozin.
The Director for investments UK “TKB investments partners” Vladimir Chuprov says that investors usually seek to conduct operations with derivatives on exchanges, where there is sufficient turnover of these instruments. “Clearing operations are secondary, they are usually tied to stock market where there are swaps or OTC market. Therefore, in order to transfer the settlement of derivative instruments from the UK to Europe, it is essential that investors began to trade in the same Frankfurt. I can hardly imagine how you can take away liquidity from the LSE,” says the Manager.
Senior portfolio Manager GHP Group Fedor Bizikov said that, if London would lose its European passport, it will lead to a gradual transfer of liquidity on European stocks. “The trader doesn’t care where to submit bids, the main thing — that there was a demand and momentum. It is logical that if the calculations will be conducted in Frankfurt or Paris, and deals with derivatives will be right there”, he said. Translation infrastructure for settlements of stock exchange transactions in the EU, according to Bizikova, a purely technical procedure, requiring only legislative regulation.
The head of France is not the first of European officials, clamoring for the imposition of restrictions on financial markets to the UK. The President of the German regulator Bafin Felix Hufeld said that after leaving the EU, London will cease to be the center of trade instruments which are denominated in euros. These operations must move to Frankfurt, he said. “It would be politically short-sighted to leave a considerable share of transactions with instruments in euros outside the EU”, — quotes the words of the official Agency Reuters.
He also added that the German regulator does not approve the terms of the merger of the London stock exchange and Deutsche Boerse. Bafin is not satisfied that the head office of the merged company should be placed in the UK. “It’s hard to imagine that the most important place of trading in the Euro zone will be controlled from headquarters outside the EU. This needs to change,” said Hofeld.
The decision to combine the businesses of Frankfurt’s Deutsche Boerse and the London stock exchange (LSE) announced in March. The merger should be the largest deal among exchange operators in 2013, when the Intercontinental Exchange (ICE) acquired control of the new York stock exchange NYSE Euronext. New Playground, according to Moody’s, could become the largest in Europe, argue with the American competitors. Evaluation of Citibank, the combined site would be able to claim a share of 35% of the market clearing in Europe.
Earlier in the week, the leadership of the LSE and Deutsche Boerse said that while the plans and the terms of the transaction do not change. DSW German Association that unites small investors, demanded to cancel the transaction, writes the WSJ. “The leadership of Deutsche Boerse should critically review the merger plan and either make major changes or to be buried,” — said the representative of the Association Klaus Needing.