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Euro Trading To Cost Investors Extra €100bn If Moved From London

Xavier Rolet, CEO of London Stock Exchange has warned that moving out the euro clearing business from London post Brexit could result in investors having to bear extra costs of nearly €100 billion over the next five years.

Writing for a newspaper, Rolet stated that if euro clearing was relocated to the European Union (E.U) it would actually increase systemic risk and also increase costs along with diverting capital away from European markets.

The London Stock Exchange owns a majority stake in the London Clearing House (LCH), which is one of top clearing houses operating in the city.

London became the primary hub for handling clearing for euro-denominated trades in the aftermath of the 2008 financial crisis. It currently handles almost 70 percent of all euro-denominated trades globally. The presence of a clearing house acts as a buffer by guaranteeing trade contracts through collaterals. This arrangement is aimed at preventing a domino effect in case of a default by any one trading party and protects the system as a whole.

Financial Times

Euro-denominated trades worth nearly €930 billion are cleared every day via London currently. The Brexit vote has brought this under scrutiny, resulting in several European leaders demanding that it be moved to a location within the EU. Recently, Manfred Weber, a key ally of German Chancellor Angela Merkel as well as European Commission president Jean-Claude Juncker have stated that the expectation at large was that euro business should be carried out within the Eurozone.

The LCH has established itself as a vital part of the ecosystem. Micheal Cole-Fontayn, the chairman of BNY Mellon in Europe and the chair of the Association for Financial Markets in Europe (AFME) recently mentioned in a media interview that LCH had been successful at creating an efficient network that generated enormous efficiencies today in terms of operations and risk management.

Although the European Commission is yet take a public stance, a recent EC policy paper regarding the handling of euro-denominated derivatives has been floated, a possible hint of its position. According to Rolet any decision that depends on location as a criteria, would fragment the global market.

In a statement Rolet said

London clears 18 major currencies and these multi-currency netting efficiencies meant LCH saved its customers $21 billion in capital last year. Strip out euro clearing and you lose these efficiencies, potentially increasing cumulative trading costs by €100 billion over five years. If Europe insists on trying to implement an artificial, inefficient location policy, it will only hurt the European capital markets and real economy

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