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[LONDON] The British seat at the European Union summit had been empty for less than 24 hours before leaders from France and Germany were haggling over one of the UK economy's crown jewels: the business that facilitates trading in euro- denominated derivatives.
French President Francois Hollande said on Wednesday that clearing operations belong in a country in the euro zone - like his. "I hope Europe's financial market will get ready for the operations that will no longer be possible in the UK," he said in Brussels. German officials countered that Paris is dreaming if it thinks it can beat out Frankfurt, the home of the European Central Bank and Deutsche Boerse AG's Eurex operations.
"It seems wishful thinking from Hollande that this market would move to Paris," Michael Fuchs, a deputy head of German Chancellor Angela Merkel's Christian Democratic Union, said in an interview. "It could also move to Frankfurt." The tiff over something that may not even come to pass provides an early indication of how contentious the British departure from the EU promises to be. The UK, urged by the EU's other 27 members to get on with the process of acting on the June 23 referendum to quit the bloc, has given no indication when it will start the two-year clock on exit talks. British Prime Minister David Cameron dined with his counterparts on Tuesday and returned to London, leaving the EU leaders to meet without Britain the next day.
Lucrative for London Clearing is an essential part of financial-market infrastructure - it's lucrative for the London-based companies that provide it, and its gravity pulls in other services like collateral management, legal jobs and trading. Clearinghouses have emerged early in what will be a much bigger campaign to pressure the UK, because it's a battle that the ECB lost against the UK last year.
Dismayed that so much euro clearing takes place in London, the ECB sought to bring it under its regulatory control by shifting it to a euro-area country. UK Chancellor of the Exchequer George Osborne sued and won, a victory that reinforced London's status as Europe's financial hub.
An EU court ruled that the ECB doesn't have the scope to regulate securities clearing. The court said if the ECB found this power necessary, it would need to ask EU lawmakers to change the law and add it to its list of responsibilities.
Right now, the UK is still part of the EU, so presumably, it can still lobby for its own powers for at least another two years. How effectively lawmakers can do so after the Brexit vote is an open question, however. The location of clearing houses for euro payment and settlement services in the future hinges on details of the exit agreement, says ECB Executive Board member Yves Mersch.
It will depend on how treaties define the UK's "future relationship with Europe," Mr Mersch said in an interview. "And I can't give an answer on that today, because these negotiations haven't started yet." LCH, majority-owned by London Stock Exchange Group Plc, and Atlanta-based Intercontinental Exchange Inc's ICE Clear Europe are among the biggest players in London. They both have units outside the UK that are in the EU.
Clearinghouses have been deemed systemically important by their government overseers. They were embraced by regulators after 2008, when Lehman Brothers Holdings Inc threatened to bring down other firms. Clearinghouses stand between buyers and sellers, holding collateral from both, in case a member defaults. Big trading companies are increasingly required to use them.
For more coverage of the EU referendum, visit bt.sg/BrexiT