The recent announcement by Deutsche Bank that it is to move almost half of its euro clearing activities from London to Frankfurt has sent shudders through the London market. Deutsche is one of the five largest clearers of interest derivatives, and has been doing all its clearing to date in London. The move will provide a big boost to Deutsche Börse’s ambitious plans to concentrate clearing in Frankfurt, an area subject to strong regulation and supervision in full conformity with EU standards.
Deutsche Bank’s move could provide pointers to the future
London Stock Exchange, which owns the hitherto incumbent London Clearing House, is warning of the loss of 100,000 jobs if London loses its status as the euro clearing hub. As the undisputed leader, the LCH with its 1,200 employees has been processing up to €1 trillion of notional deals per day; clearing of these derivatives has become a key Brexit battleground for regulators, banks and exchanges. The loss of business to mainland Europe has so far been very limited. But the Deutsche Bank plan, while not yet impacting on job numbers, can provide pointers to future directions.
About half of the clearing business in London is denominated in US dollars, and this should not be unduly affected by Brexit. But much of the remaining business could be attracted to rival European financial centres, particularly if there is still uncertainty over the nature of the Brexit agreement by early next year.
The proposed ‘transition’ period of two further years for the UK to adjust depends entirely on the UK securing a clean deal with the EU, who will not tolerate a waffly arrangement. The next looming deadline is October, and the EU negotiating team will be armed to the hilt. The British team will have to have much more clarity than they’ve shown to date if there is to be any hope of a deal being ushered in.
Is the Brexit deal at risk?
But the odds on a “no deal” outcome have risen sharply in the past two weeks. Theresa May’s gathering of her Cabinet colleagues at her Chequers country house bound her ministers to a unanimous support of Britain’s case in the upcoming negotiations with Brussels, from which clear support from the EU side is a prerequisite if Britain is not to crash out of Europe ignominiously in March of next year.
It’s not at all clear that Mrs. May can garner sufficient support among her own party to even sit down with EU negotiators to discuss her demands – to be in the single market when it suits, freedom from the common external tariff but with its own unique customs arrangements, control over movements of people, and freedom from the tyranny of the European Court of Justice. It’s a tall order, and it’s almost certainly not going to happen. At least in its current form.
Mrs. May’s White Paper on the nature of Britain’s relationship with Europe is delusionary, and will be rejected by Brussels. Resistance from within her own party will probably scupper the plan when the politicians return after the summer. And there’s no guarantee that Parliament will approve the ‘soft’ Brexit proposal that’s currently on the table.
London’s market still stable
If Britain ends up leaving by default, without any of the avowed benefits of sovereignty and independence that the Leavers demand, it will have lost on all fronts. That’s when real hard decisions will be taken on property investments, and the real exodus from London could start.
The resilience of the London market since the Brexit referendum has surprised a lot of observers. Several major companies including Facebook and Google have committed to a big expansion in their office space and job numbers in the city. There have been no mass evacuations of London banking staff to the Continent, although there is a slow drip-feed of some staff and services, which looks set to continue. But so far there is little sign of a fall-off in demand for City of London office space, with commercial property prices at their highest level since just after the Brexit vote in 2016.
However, London property brokers are already reporting that deals are taking longer to sign at the moment than they were 12 months ago. A bad result by March could accelerate the sense that all those contingency plans drawn up now need to be readied for action.