Clearing houses, a critical issue of Brexit

Analysis - 6/26/2016

24 hours after the British people voted for Brexit, on France Inter, François Villeroy de Galhau, Governor of the French Central Bank, raised the issue of clearing houses and their possible relocation in the euro zone. In her analysis on the consequences of Brexit, published on 11 April 2016, Mathilde Lemoine, Group Chief Economist, was already emphasising the importance of the political and economic issue.

The United Kingdom had failed to secure a veto on affairs concerning the euro area. This was a crucial issue in the eyes of the United Kingdom, which has had a poor view of the euro area's further integration, and of the UK's own exclusion from certain financial and monetary decisions.

The British were particularly frustrated with the unilateral decision of the European Central Bank (ECB) to require that clearing houses handling euro-denominated transactions be located in the euro area, in order to have complete supervision over this key part of the European financial system and of that system's stability. The United Kingdom even brought a case before the European Court of Justice (ECJ) in 2011, to prevent the ECB from relocating the clearing houses handling euro-denominated transactions. Although the ECJ did not rule in their favour on the substance, it did so on the form, ruling that the ECB did not have the competency necessary to impose such a measure.

As a result, the European Council could still take up the matter and require that clearing houses leave the United Kingdom.  The EU therefore has considerable leverage over the UK, whether or not the British vote for Brexit. Far from being a merely technical or financial decision, this issue has political and economic consequences, and probably helped to trigger the calls for a referendum.

In practical terms, the European Council would be able to immediately impose a euro-zone residency condition for clearing houses that trade in euros.

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Summary analysis by Mathilde Lemoine, “Regardless of the outcome of the Brexit referendum, the euro area will come out ahead”

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