Brexit could break clearing, experts warn

Industry warns of dire consequences for clearing business due to UK’s decision to leave the EU.

By Paul Walsh

The UK’s decision to leave the European Union may act as “the straw that broke the camel’s back for the clearing business” by increasing pressure on existing challenges the industry faces.

Speaking at future of clearing and settlement event in London, Simon Puleston Jones, head of Europe for the FIA, said Brexit followed came on top of a number of challenges for those in the clearing business.

“There were challenges prior to the Brexit vote such as the impact of leverage ratio which has seen several institutions withdraw from clearing services. There are also challenges on the buy-side when it comes to access to clearing and like every part of the industry, there are challenges when it comes to reporting.

“So why might Brexit be the straw that breaks the camel’s back, it is because of that context. So the cost of having to move your business may be significant enough for the global head of clearing at an investment bank to say we are no longer willing to support this business model.

“This will have several negative consequences for regulators because it will challenge regulatory objectives and on the buy-side because it means you’ll have fewer clearing brokers to choose from,” said Puleston Jones.

The issue of clearing has attracted much industry coverage since the UK’s decision to leave the EU last June.

Outgoing CFTC chairman Timothy Massad warned of tough clearing negotiations for the UK than for other countries when negotiating with London over clearinghouse equivalence. The equivalence process will not begin until after the UK exits the EU and should the UK fail to gain clearinghouse equivalence, European firms would face higher capital charges for transactions cleared in the UK.

Fellow panellist Stephen Fisher, managing director for government affairs and public policy at BlackRock also outlined the potential implications for Brexit on clearing.

“From a buy-side perspective Brexit in clearing is a very complicated issue, when buy-siders think of the risks from Brexit they think of the possible fragmentation of liquidity which really is an issue.

“The second issue is around cost because in the agency model that we are providing, putting clients’ pension funds, sovereign wealth funds into clearing has costs and those costs will be felt by the end investor so we need to be mindful of this from social perspective,” said Fisher.