Best of the Week
Most Popular
1. Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - Nadeem_Walayat
2.Gold Price Focusing on May Cycle Bottom - Jim_Curry
3.Silver, silver, and silver! There’s More Than Silver, People! - P_Radomski_CFA
4.Is the Malaysian Economy a Potemkin Village - Sam_Chee_Kong
5.Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - Troy_Bombardia
6.A Big Stock Market Shock is About to Start - Martin C
7.A Long Term Gold Very Unpopular View - Rambus_Chartology
8.Stock Market “Sell in May and go away” Study When Stocks Are Down YTD - Troy_Bombardia
9.Global Currency RESET Challenge: Ultimate Twist - Jim_Willie_CB
10.The Coming Silver Supply Crunch Is Worse Than You Know - Jeff Clark
Last 7 days
Natural Gas Setup for 32% Move in UGAZ Fund - 19th Jun 18
Magnus Collective To Empower Automation And Artificial Intelligence - 19th Jun 18
Trump A Bull in a China Shop - 19th Jun 18
Minor Car Accident! What Happens After You Report Your Accident to Your Insurer - 19th Jun 18
US Majors Flush Out A Major Pivot Low and What’s Next - 18th Jun 18
Cocoa Commodities Trading Analysis - 18th Jun 18
Stock Market Consolidating in an Uptrend - 18th Jun 18
Russell Has Gone Up 7 Weeks in a Row. EXTREMELY Bullish for Stocks - 18th Jun 18
What Happens Next to Stocks when Tech Massively Outperforms Utilities and Consumer Staples - 18th Jun 18
The Trillion Dollar Market You’ve Never Heard Of - 18th Jun 18
The Corruption of Capitalism - 17th Jun 18
North Korea, Trade Wars, Precious Metals and Bitcoin - 17th Jun 18
Climate Change and Fish Stocks – Burning Oxygen! - 17th Jun 18
A $1,180 Ticket to NEW Trading Opportunities, FREE! - 16th Jun 18
Gold Bullish on Fed Interest Rate Hike - 16th Jun 18
Respite for Bitcoin Traders Might Be Deceptive - 16th Jun 18
The Euro Crashed Yesterday. Bearish for Euro and Bullish for USD - 15th Jun 18
Inflation Trade, in Progress Since Gold Kicked it Off - 15th Jun 18
Can Saudi Arabia Prevent The Next Oil Shock? - 15th Jun 18
The Biggest Online Gambling Companies - 15th Jun 18
Powell's Excess Reserve Change and Gold - 15th Jun 18
Is This a Big Sign of a Big Stock Market Turn? - 15th Jun 18
Will Italy Sink the EU and Boost Gold? - 15th Jun 18
Bumper Crash! Land Rover Discovery Sport vs Audi - 15th Jun 18
Stock Market Topping Pattern or Just Pause Before Going Higher? - 14th Jun 18
Is the ECB Ending QE a Good Thing? Markets Think So - 14th Jun 18
Yield Curve Continues to Flatten. A Bullish Sign for the Stock Market - 14th Jun 18
How Online Gambling has Impacted the Economy - 14th Jun 18
Crude Oil Price Targeting $58 ppb Before Finding Support - 14th Jun 18
Stock Market Near Another Top? - 14th Jun 18
Thorpe Park REAL Walking Dead Living Nightmare Zombie Car Park Ride Experience! - 14th Jun 18
More on that Gold and Silver Ratio 'Deviant Conundrum' - 13th Jun 18
Silver Shares? Nobody Cares - 13th Jun 18
What Happens to Stocks, Forex, Commodities, and Bonds When the Fed Hikes Rates - 13th Jun 18
Gold and Silver Price Setting Up for A Sleeper Breakout - 13th Jun 18
Tesla Stock Analysis - 12th Jun 18
What Happens Next to Stocks when Russell Goes up 6 Weeks in a Row - 12th Jun 18
Gold vs. Stocks: Ratios Do Not Imply Correlation - 12th Jun 18
Silver’s Not-so-subtle Outperformance - 12th Jun 18
Why You Should Brace Yourself for Big Financial Changes - 11th Jun 18
Inflation to Skyrocket When Fed Reverts to New QE & Interest Rate Cuts - 11th Jun 18
Stock Market Topping Pattern or Just Consolidation? - 11th Jun 18
Study: What Happens Next to Stocks When the Put/Call Ratio is Very Low - 11th Jun 18
G7 Chaos, Central Banks and US Fed Will Drive Stock Prices This Week - 11th Jun 18
SPX Unshackled - 11th Jun 18
When Trump Met Fibonacci And Won - 11th Jun 18
FREE Theme Park Entry with Cadbury's Choc's! Legoland, Alton Towers, Chessington.... - 11th Jun 18
Stock Market Could Pullback for 1-2 weeks, But Medium Term Bullish - 10th Jun 18
End of the World Stock Market Chart! - 10th Jun 18
All US Homes Are Overvalued - 10th Jun 18
Thorpe Theme Park London Car Park Exit Nightmare - Drivers Beware! - 10th Jun 18
Gold Price Summer Doldrums - 9th Jun 18
How to Prepare for Economic Uncertainty with Gold and Silver - 9th Jun 18
5 "Tells" that the Stock Markets Are About to Reverse - 9th Jun 18
Billionaire Schools Teacher in NAFTA Trade Talks - 9th Jun 18
Land Rover Discovery Sport ECO Mode Real World Driving MPG Fuel Economy - 9th Jun 18
Crude Oil Bullish Weekly Reversal vs. Bearish Monthly Reversal - 8th Jun 18
Fed’s Interest Rate Hike is Short term Bearish for Stocks - 8th Jun 18
The Deviant Conundrum Called Silver - 8th Jun 18
Pleasure Island Theme Park Cleethorpes, Last Day Trip Before it Closed Down - 8th Jun 18
America’s One-sided Domestic Financial War - 8th Jun 18
Debt Consolidation Advice: When and Why to Consolidate - 8th Jun 18
Get Out Of Crypto Cannabis Bubble Before It Pops and Move Into Bargain Basement Miners - 8th Jun 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

Why The EU’s Recent Plans To Regulate London’s Financial Sector Are Overblown

Politics / BrExit Jun 19, 2017 - 04:05 PM GMT

By: John_Mauldin

Politics

By Antonia Colibasanu : A major concern after Brexit was that it will destroy the financial sector in the UK and and the EU since London is a financial hub.

Those who hold this view would see the European Commission’s new plans announced on June 13 to regulate a very lucrative industry in London’s financial sector as a case in point.


But this view fails to recognize that both the UK and the EU do not want to see a massive shake-up in the sector.

What’s the Exact Proposal?

The proposed plan would allow the EU to regulate clearing houses that settle certain types of euro-denominated contracts located outside the EU.

Clearinghouses act as a middleman between buyers and sellers of derivatives. They ensure that transactions are completed smoothly and bear the cost if one of the parties doesn’t hold up its end of the deal.

They, therefore, help ensure that the effects of a default don’t spread to the rest of the financial system.

The London Clearing House, which is partly owned by the London Stock Exchange, is the global leader for the euro clearing business. It clears roughly three-quarters of all euro-denominated interest rate derivatives transactions.

Since this is a substantial portion of the global business, what happens in London could have a significant impact on the stability of the eurozone, even though the UK doesn’t use the single currency.

For this reason, the European Central Bank insisted in 2011 that euro-denominated derivatives trading should take place only in the eurozone. Eurozone countries had argued that the LCH made the debt crisis even worse by raising its margin requirements (the amount that buyers and sellers are required to hold in an account as collateral against derivative contracts) on debt for Spain and Ireland. The UK challenged the ECB in court and won.

The European Commission’s proposed measure is a way to ensure that, once Britain leaves the union, the EU will have some control over euro-denominated clearinghouses. Some have speculated that London may lose this lucrative business because the UK could refuse to accept the regulations.

But that would be a politically motivated move by the UK government, and since it would go against the country’s own interests considering the value of this business to the British economy, it is unlikely to happen. The London Stock Exchange will decide whether it will comply with the regulations, and it has no incentive not to.

Clearing House Relocation Isn’t Required

Ultimately, this move will not force clearinghouses to relocate to EU member states. The commission’s proposal says that when handling transactions denominated in currencies used in EU states, clearinghouses in non-EU states will need to respect requirements outlined by the central banks that issue those currencies.

These requirements can relate to liquidity, payment or debt settlement arrangements, or collateral margin requirements. The proposal does not, however, require that clearinghouses be located in the EU.

The EU has no financial incentive to force all euro-denominated trading out of London. London is where most currency derivatives are traded—larger clearinghouses can afford to offer better rates to their customers because of economies of scale, which explains why the LCH is more attractive for traders.

Having clearinghouses move to continental Europe would create a fragmented market, which would lead to higher costs for customers and less trading in euro derivatives—bad news for the EU.

The proposed policy also mirrors the arrangement the US has for the dollar-denominated clearinghouse business in London. Once the UK is no longer an EU member, the ECB can demand more oversight over the way London handles euro-denominated trade, as the United States does.

This Doesn’t Change a Lot in the End

The commission’s proposal still has to be approved by the EU member states. Once that’s done, the UK will need to decide whether the proposed regulations are in its interest.

The government doesn’t want to be seen as giving in to the EU, especially while negotiations over its withdrawal from the union are still taking place. But 83,000 jobs in the UK are dependent on the euro clearing business, and the government wouldn’t want to lose those jobs.

More important, the LCH already said last week that it is willing to accept more oversight from Brussels.

The EU may be using this proposal as a bargaining chip in its Brexit negotiations with the UK, but it’s unlikely that the UK will reject the regulations. It doesn’t want to lose such a valuable business.

Therefore, this move should not be interpreted as a sign that Brexit will have drastic consequences for the UK’s financial sector. It is merely proof that Brussels and London are adapting to the new post-Brexit reality.

Grab George Friedman's Exclusive eBook, The World Explained in Maps

The World Explained in Maps reveals the panorama of geopolitical landscapes influencing today's governments and global financial systems. Don't miss this chance to prepare for the year ahead with the straight facts about every major country’s and region's current geopolitical climate. You won't find political rhetoric or media hype here.

The World Explained in Maps is an essential guide for every investor as 2017 takes shape. Get your copy now—free!

John Mauldin Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules