The implications of the ECB forcing the clearing of euro-denominated trades through the European single-currency area for the UK are clear: it’s an existential threat to the City’s status as the pre-eminent hub for the euro wholesale market, given the euro’s position as the second most-traded currency after the dollar.
The ECB believes clearing and settlement is a critical piece of market infrastructure that it should oversee for financial stability purposes, explains Gregor Irwin, chief economist at Global Counsel.
“If that happens, the risk is that trading would follow clearing and settlement, weakening one of the pillars of London's position as Europe's leading financial centre,” he says.
Raoul Ruparel, co-director of policy think-tank Open Europe, says neither the ECB nor the Banque de Francehave given up on the idea of forcing the clearing of euro-denominated trades through the eurozone since a European Court of Justice (ECJ) ruling in March 2015, which found in favour of the UK as a hub for euro clearing against ECB objections.
“Given that the ECJ ruling said this was beyond the purview of the ECB, it is not entirely clear whether the ECB could take immediate action to move this activity from the UK even in the event of Brexit,” he explains. “A change to the statute of the ECB might have to be sought.”
There is also uncertainty around what would happen to the passporting rights of clearing houses in any post-exit scenario, continues Ruparel, adding: “If passporting was not maintained, clearing of euro-denominated trades through the eurozone could happen anyway.”
However, Ruparel also observes that the Bank of England could argue that the swap lines put in place to counter the ECB’s expressed concerns over the lack of direct access to ECB liquidity would continue to function even if the UK left the European Union.
In this case, any decision to move clearing from the UK would clearly be motivated by politics rather than economics.
“The ECB statute could be changed by QMV [qualified majority voting – a system of weighted votes] rather than unanimity, which means the UK could not simply veto any change even if it remains in the EU,” he adds.
“However, since this issue has been driven by France in particular and Spain, it is far from clear that there would be sufficient support from other EU members, and the UK would also have recourse to the ECJ if it was still a member of the EU.”
Christian Odendahl, the Centre for European Reform’s (CER) chief economist, agrees it is a political question whether the eurozone would be willing to use its qualified majority in the EU to immediately change the ECB statutes after a Brexit vote but before Britain has fully left the EU.
“It would certainly be a relatively aggressive step during what will be a long and difficult divorce negotiation,” he says. “I consider it unlikely that such a decision would be taken before Britain had formally left the EU.”
Simon Gleeson, a partner at Clifford Chance specializing in international banking services and financial regulation, observes that the whole point of the single market legislation is to prevent countries and organizations (including EU organizations such as the ECB) interfering with the freedom of EU firms to do business in their jurisdictions.
“The development of London as the EU financial centre has been largely based on those rules which would, of course, abruptly vanish on the day that the UK left the EU,” he says.
“However, the fact that the EU would be able to take back what it regards as ‘its’ financial centre does not mean that EU institutions would immediately launch a full-on regulatory and legal assault on cross-border business done from London with EU clients and investors.”
According to Massimiliano Danusso, managing partner of BonelliErede’s London office, recent comments by the German finance minister Wolfgang Schäuble appear to support the view that the EU will react to Brexit by making the leave process difficult for the UK.
The ruling of the ECJ in March 2015 was based on the supposed lack of competence of the ECB to rule on the activity of securities clearing systems, adds Danusso.
“In case of Brexit, the position taken by the ECJ would not, therefore, be directly affected,” he says.
“However, the ECJ itself suggested a possible solution to this issue, by highlighting that the ECB could request the EU legislature to amend the existing regulations by the addition of an explicit reference to securities clearing systems.”