In the post-Brexit battle for London’s financial-services industry, an obscure back-office function intended to bring more stability to trading has emerged as a pawn.

Now that French and German officials have already targeted the industry, there are signs the U.K. is readying its defenses. Since the 2008 financial crisis, there has been a boom in clearing, which acts as a firewall against defaulting traders. Post Brexit, if other countries follow through on their threats to repatriate euro clearning, thousands of jobs at the clearinghouses and their member banks could be endangered.

Davis Polk & Wardwell’s Michael Sholem says that the key pillars supporting the 2 million workers in the U.K.’s financial industry is clearing, along with bank access to the EU.

“A gradual erosion over 10 to 15 years is likely if those pillars are knocked away. There’s a question about how much of that can be replaced by new markets,” said Sholem, European counsel at the law firm.

The foundations of one of the U.K.’s biggest private industries and its biggest source of corporate tax could be weakened if banks and brokers may choose, or even be required, to move some staff and operations closer to any clearing firm that leaves the City of London.

Brexit may move force them to move jobs out of London, warned bankers that include JPMorgan Chase & Co.’s Jamie Dimon and HSBC Holdings Plc’s Stuart Gulliver.

Guideline on how the financial district could protect itself after Brexit were published by the City’s main lobbying group in a report on Aug. 3. Making more of their process electronic and starting to handle emerging-market currencies are some of the measures that London’s clearinghouses should take, said TheCityUK. The report said that London’s position would be reinforced by both measures.

Since it has already been targeted by euro-area officials, London’s clearing industry may be the first financial casualty of Brexit. Efforts to require euro trades be cleared in the euro area were met with a successful legal challenge by the U.K. when such attempts were tried years ago by the European Central Bank.

Compared with Frankfurt’s $62 billion and Paris’s $25 billion, $230 billion of cash and bonds as collateral against their members defaulting is held by London’s clearinghouses. London’s clearinghouses directly employ about 700 people.

Raoul Ruparel, co-director of Open Europe, an independent think tank sayd that if clearing goes, “there would be a knock-on effect” for moving other jobs.

The world’s largest economies mandated clearing for many derivatives contracts after the financial crisis. The largest clearer for interest-rate swaps was London’s LCH Group, part of London Stock Exchange Group Plc.

Funds between the clearinghouse and its members and back again are moved by bankers and operations teams in a clearinghouse. Deciding on risk thresholds and monitoring members, the show is run by risk managers.

“It’s important to have people who have a risk mindset. The core purpose of a clearinghouse is to manage risk. Clearing requires a certain level of expertise, but certain elements can be taught,” says Daniel Maguire, who runs the swaps business at LCH Group.

(Adapted from Bbloomberg)

Categories: Economy & Finance