Don't Count London Out

France's threats to London's dominance ring hollow.

The way French President Francois Hollande tells it, it sounds like a fait accompli. London will be forced to give up its dominance over the clearing of trades done in euros as a consequence of leaving the European Union.

But it's probably safe to file this simple act of retaliation under "not going to happen."

Aside from the oddity of a Socialist President who once declared finance his "enemy" now cheer-leading the $493 trillion derivatives market as a national champion, the impracticality, cost and legal obstacles of cutting up a market along currency lines make it a pretty weak bargaining chip.

The legal route to toppling the City of London has been tried before -- and has only served to strengthen the long-running, but awkward, arrangement where most clearing of euro trades takes place outside the euro area.

Last year, the EU General Court in Luxembourg ruled the ECB lacked the power to dictate the location of clearing-houses. The result was closer cooperation and an extended swap arrangement with the Bank of England. The deal filled a gap in cross-border financial regulation without forcing an industry to up sticks.

Global Hub

Share of year-to-date clearing volumes by currency at London-based SwapClear, owned by LCH.Clearnet

Source: Bloomberg Intelligence

About 70 percent of trading in euro-denominated interest-rate swaps takes place in Britain, compared with 11 percent for France and 7 percent for Germany, according to the Bank for International Settlements. The City's clearing industry processes more than $900 billion of trades daily, as this Bloomberg QuickTake notes.

Unequal Share

Daily average OTC euro interest-rate derivatives turnover by country in April 2013

Source: Bruegel, Bank for International Settlements

Would leaving the EU really be a game-changer?

The saber rattling from French officials suggests so -- and it's hard to see how the U.K. could, from outside the EU, block legislation to give the ECB powers to regulate clearing.

But forcibly wresting clearing-houses from non-euro countries would likely raise hackles even outside London. The U.S., Switzerland and Singapore are among the top five foreign exchange markets trading in euros, according to a report by think-tank Bruegel; Denmark (which isn't a member of the euro) and the U.S. are also top-five markets for euro interest rate derivatives.

Imagine the diplomatic headaches and tit-for-tat threats over trades in dollars, kroner and sterling as a proposed ECB power grab plods through Europe's parliament, commission and council of ministers. Brussels has bigger fights to deal with right now.

Even if somehow Europe were able to single out London for punishment, big banks are unlikely to want a fragmentation of global derivatives markets and neither are their customers.

Chopping this market up across currency-specific entities would make it more expensive to clear swaps and reduce netting benefits for clients, according to Bloomberg Intelligence.

It's not even clear regulators would want it: look at the recent efforts expended by European and U.S. financial supervisors in agreeing to coordinate oversight of global securities and derivatives markets across national lines.

Of course, all bets are off if London loses access to Europe's single market. Without a European badge of approval or a separate local entity, U.K. clearing-houses would be at a disadvantage whatever the ECB decides to do. But given the fallout for the U.K. would spread far beyond clearing and settlements, London will likely do all it can to keep its passport -- even if it means abiding by EU rules.

The final irony for Hollande is that if any euro zone hub is likely to woo clearing business away from London, it will most likely be Frankfurt -- for commercial, not legal, reasons.

LCH.Clearnet is the world's largest clearing-house to settle interest-rate swaps; it's majority owned by the London Stock Exchange, which is fighting to protect its proposed takeover by Germany's Deutsche Boerse.

Should German officials get their way and force the combined entity to be based in Frankfurt, that would probably be the closest Paris gets to grabbing London's clearing crown. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Lionel Laurent in London at

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    Edward Evans at

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