Banks' Brexit Plans Are Headed for the Shredder
Another day, another Brexit contingency plan: Global banks are preparing for London to be stripped of its ability to clear euro-denominated derivatives after the U.K. leaves the EU, according to Bloomberg News.
Banks are absolutely right to plan for this kind of eventuality, even if, as we've argued before, it would be an unlikely and costly one. Forcibly wresting euro clearing from non-euro countries would likely raise hackles from the U.S. to Singapore; European corporate clients and investors would also probably push back against the disruption and higher costs this move would entail.
But let's be serious. All these reams of contingency plans for a multitude of Brexit scenarios -- no access to the single market, no euro clearing, no free movement of people -- risk looking out of date well before the official exit process is even triggered. Here's why:
Donald Trump could become president. The U.S. is in the final stages of a presidential race that could see Trump, who has said post-crisis bank reforms have made it "impossible for bankers to function," take the White House. If that happens, and if Trump makes good on his promise to dismantle the Dodd-Frank Act, the global post-crisis push to drive more trades through central clearing could fizzle out. A de-regulated U.S. that promotes ease of business over transparency and financial stability might tempt more business away from Europe. That might encourage the continent's regulators to take a softer approach themselves, and lessen euro leaders' appetite to squeeze London.
London Stock Exchange and Deutsche Boerse could get approval to merge. If the exchanges get regulatory approval to unite, that will surely create the chance, and boost the will, to try to find answers to Brexit that limit the fallout for the region, including London. A merger would bring together the former's LCH.Clearnet unit -- dominant in interest-rate swaps -- and the latter's Eurex platform, which controls more than half the market in the trading and clearing of listed European derivatives. A creative approach to integrating this complex business could be found, such as a tool to centralize collateral posted by clients, according to Axel Pierron, managing director at consultancy Opimas, which might minimize disruption and prevent the need for a costly exodus.
Elections across Europe may tilt the balance of Brexit talks. Races for new leaders in France and Germany next year may bring a different tone to Brexit talks, particularly if populist anti-EU parties do better than expected. Even before then, Italy's Matteo Renzi faces a vote on an ambitious government overhaul that may cost him his job, while Austria's far-right Freedom Party also gets another chance at the highest office in presidential elections due in October. The U.K.'s ruling party, meanwhile, is in its strongest position in more than a quarter of a century. The threat of political instability in Europe may tilt the balance away from a punitive Brexit.
None of this is to say that the risk of London losing access to euro trading should be breezily dismissed. The U.K. capital accounts for about 39 percent of the global market in interest-rate swaps and handles 75 percent of euro-denominated derivatives transactions. But other game-changing turning points are coming a lot sooner -- the U.S. election is less than two months away. Banks' contingency plans should also prepare for a shredder big enough to swallow all of them.
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