The former chief executive of the London Stock Exchange Group Xavier Rolet says London’s ability to hold on to clearing services will dictate whether it remains a global financial centre.
“The litmus test of London’s appeal as a global financial centre will be whether it retains its dominance in the one quadrillion notional interest rate swap clearing market once European clearing equivalency expires,” Rolet told Financial News.
Clearing helps reduce contagion risks in financial markets. It acts as a safety net, allowing for the risk in a trade to be transferred to a clearing house, which guarantees the trade if either party defaults.
The EU granted a one-and-a-half-year temporary equivalence for the UK’s clearing houses after Brexit. The difficulty in untangling clearing from London forced the EU to grant a further three-year extension until June 2025.
If no deal is reached after that point, EU entities could be forced to make use of EU-based clearing houses, or those in countries granted “third-party” clearing status such as the US.
Rolet, who oversaw both the London Stock Exchange and London Clearing House between 2009 and 2017, had previously told FN that “the boat has sailed” when it came to granting UK clearing houses third-party recognition.
Though clearing is dominated by the UK for now — the LCH reports it clears over 90% of the cleared over-the-counter interest rate swap market — there have been signs the City might be losing its lustre.
On 14 November, Bloomberg reported that the combined market capitalisation of firms listed on the LSE slipped behind Euronext Paris. It cited the poor performance of UK midcap stocks, optimism for French luxury brands, and the pound’s losses against the dollar as the main factors leading to London losing its equity crown.
In 2014, the LSE held a close to $2tn market capitalisation lead over Paris that has slowly been eroded over the past eight years.
Rolet said that compared to the US, equities have been somewhat of an afterthought for European corporates though.
“As disappointing as it may be for London as a global financial centre to see its $2tn equity capitalisation advantage over Paris disappear since Brexit, equities have always been a sideshow in Europe as over 80% of corporate funding stems from bank lending.”
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London’s capital markets woes are not limited to equities. While the City retains the crown for foreign exchange trading and interest rate derivatives, it is losing market share to US and Asian financial centres.
A survey published in October by the Bank for International Settlements found that in 2019, 43% of FX trading and 51% of interest rate derivatives were run through London trading desks. Three years later, this has dropped to 38% and 46% respectively.
When the transition period for Brexit ended in January 2021, $4tn of derivatives left UK and EU markets for the US, according to research firm Clarus.
How the City has fared in its post-Brexit battles:
January 2021 — $4tn in derivatives leave UK and EU markets for the US
January 2021 — EU grants full equivalence to US clearing houses
April 2021— London to attract far fewer EU firms as Brexit risks ‘balance of power’
June 2021 — Trader ‘chaperones’ ignite worries on Brexit workarounds
June 2021 — UK holds Europe’s financial top spot as Asia makes gains
December 2021 — Brexit will get real in 2022: ‘This year has been a hall pass for everyone’
February 2022 — UK equity fund outflows nearly £3bn
February 2022 — EU extends equivalence for UK clearing houses until June 2025
February 2022 — Xavier Rolet says ‘boat has sailed’ on London clearing amid Brexit battle for trillion-euro business
March 2022 — 7,000 City jobs have moved to the EU
April 2022— London IPOs down more than 90% as war, inflation and commodity prices crush raisings
May 2022 – Goldman Sachs and JP Morgan increase their European headcount
September 2022 — ECB set to visit banks in sign of post-Brexit rules crackdown
October 2022 — IPOs continue to slump as Q3 volumes fall sevenfold
October 2022 — London is still top for FX trading, but it’s losing ground
November 2022 — Bloomberg reports London losing its stock market crown
To contact the author of this story with feedback or news, email Jeremy Chan
