Impact of Brexit on Euro Clearing Market

This assignment examines the significant impact of Brexit on the United Kingdom's euro clearing market. It delves into the proposed EU regulations aimed at relocating euro clearing activities away from London, exploring the potential consequences for market liquidity, financial stability, and the role of the City as a global financial hub. Students are tasked with analyzing various perspectives on this issue, including those of regulators, industry players, and economists.

Dissertation
(Brexit and the battle for control of euro clearing - a
legal and tactical analysis of the competing
regulatory powers of the UK and EU concerning
central counterparties)

Table of Contents
CHAPTER – 1 INTRODUCTION..................................................................................................1
1.1 Background of the study........................................................................................................1
1.2 Problem statement..................................................................................................................4
1.3 Research aims and objectives................................................................................................4
1.4 Potential contribution.............................................................................................................4
1.5 Disposition.............................................................................................................................5
CHAPTER -2 LITERATURE REVIEW.........................................................................................6
2.0 Introduction............................................................................................................................6
2.1 Understanding the working of clearing houses......................................................................6
2.2 Reasons of Brexit and its impact over legal & political uncertainties...................................8
2.3 Impact of Brexit on Euro Clearing system.............................................................................9
2.4 Legal & tactical evaluation of UK and EU’s regulatory authorities’ power concerned to
central counterparties.................................................................................................................11
CHAPTER – 3 RESEARCH METHODOLOGY.........................................................................15
3.0 Introduction..........................................................................................................................15
3.1 Research philosophy............................................................................................................15
3.2 Research approach...............................................................................................................16
3.3 Research design....................................................................................................................16
3.4 Research type.......................................................................................................................17
3.5 Data collection.....................................................................................................................18
3.6 Data analysis........................................................................................................................18

3.7 Reliability & validity...........................................................................................................19
3.8 Ethical implications..............................................................................................................19
3.9 Limitation & strategy followed to overcome obstacles.......................................................19
CHAPTER – 4 DATA FINDINGS AND ANALYSIS.................................................................21
4.0 Introduction..........................................................................................................................21
4.1 Data findings and presentation.............................................................................................21
Dominant position of London in the Euro clearing market.......................................................21
Brexit consequences on the dominant position of LCH and its trade volume...........................25
Impact of brexit over the legislation & regulatory requirement on London based clearing
houses.........................................................................................................................................25
4.2 Analysis and interpretation..................................................................................................26
Dominant position of London....................................................................................................26
Legal & tactical issues in relocation proposal...........................................................................27
Impact of brexit over uncertainties in the financial sector.........................................................28
Eurosystem oversight policy framework...................................................................................28
Critical reflection.......................................................................................................................29
CHAPTER -5 CONCLUSION & RECOMMENDATIONS........................................................31
Conclusion.................................................................................................................................31
Recommendations......................................................................................................................32
REFERENCES..............................................................................................................................35

CHAPTER – 1 INTRODUCTION
Research title: Brexit and the battle for control of Euro clearing: a legal & tactical
analysis of the competing regulatory powers of UK & EU with respect to central counterparties
1.1 Background of the study
Britain exit from European Union (Brexit) took place on 23rd June 2016 after 43 years of
their joint membership. The leave decision won by having majority of 51.9% votes, whilst 48.1%
people voted in favour of remaining the part of EU. England voted for the refendum by 53.4%,
Wales by 52.5%, whilst in Scotland & Northern Ireland, 62% and 55.8% people supported
remain decisions1. The debate mostly revolves around free movement of goods across EU
nations without any custom tariffs and economic benefits of EU membership. Before refendum,
Cameron, George Osborne and other senior authorities have predicted that if UK voted to leave
Union than it will lead to sudden economic crisis. Evidencing it, on the day after the brexit, the
value of pound slumped down by 15% and 10% against dollar and euro2.
However, critics argued that predictions are wrong because UK economy is expecting a
growth of 1.8% in 2016 and Germany alone has been expected to grow @ 1.9% among all
leading G7 countries3. ONS (Office of National Statistics) reported that undoubtedly, the growth
of the country has been slowed still, the economy is expanding4.
Clearing houses offer various services covers risk mitigation, capital efficiency, price
transparency, delivery facilitation and operational efficiencies for various liquid derivatives i.e.
1 'Brexit: All You Need To Know About The UK Leaving The EU - BBC News'. 2017.
Available through: <http://www.bbc.com/news/uk-politics-32810887> [Accessed on 11
August 2017].
2 Ibid
3 Ibid
4 What Is London’S Euro Clearing Market And Why Is Brussels Worried?'. 2017.
Available through: <https://webcache.googleusercontent.com/search?
q=cache:oWsR_mL3RCQJ:https://www.ft.com/content/18dcf566-5025-11e7-bfb8-
997009366969%3Fmhq5j%3De4+&cd=1&hl=en&ct=clnk&gl=in> [Accessed on 11
August 2017].
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bond, equity, interest rate and others. Clearing houses maintains high level of market integrity by
playing an intermediary role between buyer and sellers5. They discount various instrument in
return for certain margin and becomes the central counterparty for clearing and settling trades.
Thus, by this way, they plays a substantial role in maintaining financial stability. Henderson
defined derivatives as a financial product or instrument which value depends upon underlying
assets i.e. currency, security or commodity. It includes future, options and others. Central bank is
the leading authority that owes accountability to maintain financial stability through control over
money supply. The authority designs laws and economic rules and regulation for efficient
financial regulative framework6.
In London, Financial services and business volume goes beyond $900bn a day and the
most important thing is that it centered on Euro-dominated contracts of derivatives by LSE’s
(London Stock Exchange) Clearing Houses (LCH). Brussel’s proposal stated that in order to
maintain economic stability, EU regulatory authority must be given power to look overseas
clearing houses which can threaten systematic risk on financial stability in Europe. After the
economic crisis in 2008, clearing becomes a key pillar for boosting stability in the global
financial market. There are number of clearing houses i.e. LCH, Dutsche Borse’s Eurex who
plays an intermediary role between sellers and buyers of the financial instruments as they
exchange cheques, bills and other instrument for certain margin. They are also accountable for
looking the future exchanges for the trading account settlement.
The city stands in the dominant position for the clearing of derivative instruments
denominated in euro even though UK never intended to join eurozone. After the Brexit, the key
issue is that how UK located clearing houses will be regulated and policed because current rules
of EU will be no longer required to be follow7. However, its failure may bring serious issues and
5 Wood, P. R., 2007. Set off and Netting, Derivatives, Clearing Systems. Sweet &
Maxwell. UK. pp.92-101.
6 Handerson, S. K., 2010. Henderson on Derivatives. LexisNexis UK. pp.42-68.
7 What Is London’S Euro Clearing Market And Why Is Brussels Worried?'. 2017.
Available through: <https://webcache.googleusercontent.com/search?
q=cache:oWsR_mL3RCQJ:https://www.ft.com/content/18dcf566-5025-11e7-bfb8-
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huge ramifications to the EU. It is often complaint that LCH had increased its margin which
means that participants have to keep high collateral for the debt which leads to aggravated debt
crisis in Eurozone. Thus, in this regard, the main target of the EU is to give sufficient power to
European Security & Market Authority (ESMA) to examine the systematic risks that can be
posed by clearing houses located overseas. The body examine their businesses and its proportion
which is denominated in Euro currencies for ensuring financial stability.
Euro Clearing (EC) has been emerged as a key battleground in the negotiation process of
Brexit. European Central Bank (ECB) has made significant efforts to gain insight of lucrative
euro clearing market after refendum. Currently, the Euro denominated currencies which are
cleared in London, BOE (Bank of England) owes accountability to look oversight &
supervision8. However, now, after Brexit, settlement of such financial instrument that are traded
outside EU exposed to the risk of financial stability due to emergence of more than one currency.
Politicians believes that Eurozone must control all the Euro clearing covering control over
margin, collateral and managing the risk of credit default by the party. So, that, outside clearing
agents will not be able to charge additional margin which they intended to arise from the credit
in Euro. Therefore, ECB announced that there is a need of necessary amendments that will allow
regulators to examine and monitor such risk that are linked with the clearing houses and lead to
affect the monetary policy and currency stability.
ECB recommends several amendments in article 22 of the statue which provides legal
base to the eurosystem to perform role as of central bank under currently European Market
Infrastructure Regulations (EMIR) proposed so as to stabilize the euro currency. According to
the amendments, ECB can make regulations to promote sound clearing system for all the
financial instruments. EU created a centrally controlled system for the credit rating agencies, put
997009366969%3Fmhq5j%3De4+&cd=1&hl=en&ct=clnk&gl=in> [Accessed on 11
August 2017].
8 'ECB In Drive To Control Post-Brexit Euro Clearing'. 2017. Available through:
<https://webcache.googleusercontent.com/search?q=cache:UIMkjUwUQWkJ:https://
www.ft.com/content/8888e560-57e5-11e7-9fed-c19e2700005f%3Fmhq5j
%3De4+&cd=1&hl=en&ct=clnk&gl=in> [Accessed on 11 August 2017]
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restrictions on short selling of EU debt and put brake on speculation & hedging9. Authorities
have been permitted to look over the creditworthiness of euro-denominated instruments. EC
(European Commission) also recently planned to investigate EMIR including the examination of
clearers. If ECB provides clear authority to the central bank for creating sound and efficient
clearing operations within EU and with others nations than it will be a clear signal to London.
These powers present an improved role for central bank with regards to the supervisory system
of CCPs, specifically, to supervise third party for the clearing of euro-denominated instruments.
Besides this, relocation of huge clearing agents like LCH will be followed only if EU
regulators will be unable to closely supervise the CH located in London. It is just like to that of
America in which US dollar is mostly cleared outside US; still regulators have enough direct
oversight of UK located clearing houses. Till the time, EU legislations do not allow ECB to have
a direct oversight to supervise outsight clearing houses that are clearing euro dominated
instruments; the EU authority will have power to make policies for liquidity management for the
economic stability. Currently, euro-sterling swaps are used to cope up with such prevailing issue,
still, BOE (Bank of England) is committed to convey necessary information with the ECB that is
regulated by EU law and after Brexit, it needs to renegotiate. Thus, more power has been given
to EU regulators such as ECB, ESMA and others for managing possible crisis risk. Thus, the key
concern of the paper is to investigate euro clearing control issues and purposes at examining the
legal and regulatory power of both the UK & EU with respect to central counterparties10.
9 EU-Managed Control Of Euro Clearing Is Not Viable'. 2017. Available through:
<https://webcache.googleusercontent.com/search?q=cache:o1tU8P_Dm-YJ:https://
www.ft.com/content/64f5d320-3403-11e7-99bd-13beb0903fa3%3Fmhq5j
%3De4+&cd=2&hl=en&ct=clnk&gl=in> [Accessed on 11 August 2017]
10 Cremades, M. T., 2017. Brexit and the European Union: General Institutional and Legal
Consideration. [PDF]. Available through: <
http://www.europarl.europa.eu/RegData/etudes/STUD/2017/571404/IPOL_STU(2017)57
1404_EN.pdf>. [Accessed on 11th August 2017].
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1.2 Problem statement
Eurozone is not controlled by a single sovereign and LCH is one of the biggest clearing
houses that alone clear huge amount of euro-denominated financial instruments. They are
adjusting their margin on the transactions cleared which created doubt on the credit viability.
Divergent national interest for the euro clearing indulged huge risk into the system. Therefore,
EU implemented a centrally controlled system so as to create the system on fair basis in views of
eurozone authorities. Thus, this is the key concern for which the study will provide useful insight
for examining legislative framework and competing regulatory authorities power of both the UK
& EU. It is a current prevailing issue which gains scholar attention & interest to conduct a new
investigation in respective field.
1.3 Research aims and objectives
Aim: To explore legal and tactical analysis of the competing regulatory powers of UK & EU
with respect to central counterparties for euro clearing system
Objectives:
 To explore the concept of Euro clearing controlled framework
 To examine the impact of Brexit over political uncertainty & legal complexities
 To make legal and tactical evaluation of UK and EU’s regulatory authorities power with
respect to central counterparties
1.4 Potential contribution
UK recently voted to left EU membership on 23rd June 2016, this recent refendum brings
significant uncertainties in the legal & political environment. As Brexit took place recently,
therefore, there are only few studies conducted therefore, the current study will provide a
conceptual framework to the scholars who are likely to investigate the issue in future. In
addition, governing authorities of both UK and EU can also get important insight towards
examining their competing regulatory powers with reference to the central counterparties in the
currency clearing system.
1.5 Disposition
Chapter 1: Introduction: It is the commencing chapter which details out in-depth
overview of the research issue along with its rationale and key aims & objectives. Moreover, it
will discuss the significance and potential contribution of the study.
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Chapter: 2: Literature review: The given section discuss the key issue in detailed manner
by extracting useful information from various secondary sources, more importantly, journal
articles, recent news published on Brexit and others to pay emphasizes upon various legislations
to examine competing regulatory powers of EU & UK concerned with central counterparties.
Chapter: 3: Research methodology: Under this section, research methods, approach,
design, paradigm, data collection & analysis methods has been provided. It is necessary to apply
suitable & appropriate methodology because it affects the quality of results.
Chapter: 4: Data Findings and analysis: The particular section has gather data set and
analyzes & interprets the results to reflect key findings with the chosen area of the research. It is
the most crucial chapter on which the justifiable conclusion is made after deeply & thoroughly
investing the issue.
Chapter 5: Conclusion & Recommendation: The dissertation ends with this chapter which
presents summarized results of the whole study and provides a justifiable conclusion along with
some excellent recommendations to overcome the issue.
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CHAPTER -2 LITERATURE REVIEW
2.0 Introduction
Review of literature is the process in which earlier studies results are provided to gain
broad knowledge of the concept. In this section, previous studies that are conducted with respect
to similar area of the field have been presented. It is a two-folded approach which discusses the
findings & discussion of number of scholarly articles to create a conceptual base for the chosen
research issue.
2.1 Understanding the working of clearing houses
According to Armour (2017), Clearing houses works as a intermediary between both
buyers & sellers of the financial instrument11. CH acts as a third party and takes responsibility for
settling and clearing trades at collecting some margin monies for such facilities. They work as a
middle man on the behalf of both the associated parties and clear all the future contracts. CH
plays a significant role in the financial system because they purposes at promoting the market
efficiency so as to stabilize the financial system. The futures market is directly linked to the CH
where members are accountable to clear their trades.
(Source: Berg, 2016)
11 Armour, J., 2017. Brexit and financial services. Oxford Review of Economic Policy.
33(1). pp.S54-S69.
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CH is a place where various financial instruments such as bills, cheques, derivatives &
securities are exchanged by the member bank so as to meet the urgent cash requirement. Duffie
(2014) stated that CH provides a platform for trading by mutual acceptance over the terms
regards to price, contract maturity period and quantity as well12. Afterwards, the contract is
cleared by offsetting the positions together, called netting. CH only provides the services of
clearing & settlements for those futures that are traded at an exchange. As they work on the
behalf of buyer and seller, therefore, it can be said that CH acts as a neutral counterparty and
assure trade integrity & soundness. Similar to CH, central counterparty clearing (CCP) also
provides clearing facilities but in different manner by taking counterparties (brokers, members
bank) risk. CHs has been established in order to facilitate transactions among various banks such
as cheque & bill clearance and others.
In accordance with the views of Dörry (2017), tthe process of clearing needs several
precautionary measures that are necessary to be applied instantaneously during the period when
order is placed & transaction is settled13. While handling & settling future trades, CHs have
number of checkpoints in the electronic trading function so as to maintain financial integrity.
12 Duffie, D., 2014. Resolution of failing central counterparties. Sweet & Maxwell. Oxford
UK. pp.28-36.
13 Dörry, S., 2017. The geo-politics of Brexit, the euro and the City of London. Geoforum.
85. pp.1-4.
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(Source: Berg, 2016)
The above illustrated system clearly presented the journey when a trader place order for
clearing till the transaction is cleared by taking into consideration risk. Thus, by this way, they
offer risk mitigation, operational efficiency, capital security, price transparency and others. CHs
follow a comprehensive framework for the robust risk management through real-time
monitoring, market margin, stress testing, default resources and others. CHs keep track over
market exposure of each and every client so as to make sure that there are enough funds
available in order to cover risk.
Eleftheriadis (2016), demonstrated that CHs perform various functions such as
guarantees the transactions, ensure adherence with the laws, system and procedural requirement,
and perform risk management in the way of margin and others14. Market monitoring, margin
requirement & monitoring, risk checks and clearing & settlement are the key functions
performed by CHs. For instance, two parties entered into a registered bilateral contract which is
14 Eleftheriadis, P., 2016. The UK and the Eurozone After the Referendum. OUP
Catalogue. Oxford UK. pp.46-59.
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either take place at OTC or stock exchange. In this, each individual take risk due to the default
by other counterparty which in turn, party will not be able to fulfil his or her financial
obligations, called counterparty risk. In this transaction, being a market participant, CH works on
the behalf of both the counterparties and accepts their default risk by guaranteeing that payment
will be made in case of default by the parties. Once the trade is transformed from bilateral to
central counterparty is known as cleared trade. CHs minimize the risk of settlement through
netting offsetting by demanding a collateral deposit also referred as margin deposit. They
monitor the creditworthiness of the parties and maintain guarantee fund so as to cover probable
loss.
2.2 Reasons of Brexit and its impact over legal & political uncertainties
Ferran (2017), stated that Euro Clearing (EC) becomes a battleground in the process of
brexit negotiation wherein European Central Bank (ECB) has made significant efforts to gain
insight of lucrative euro clearing market after refendum15. Before the refendum, London Clearing
House (LCH) plays a significant role in the single market of EU. However, this resulted in
creating several number of issues regarding the clearance of money under Brexit where EU had a
major role in governing LCH before an active existence of Brexit in the nation. Considering the
similar concern of EU in regard to the regulatory norms of euro clearance system, has
enlightened some vital issues over here. It is basically in context to a major concern of Brussels
who are extremely concerned about the newer set of rules and regulations to be followed by the
organisations like LCH under the governance of Brexit in the country. This is mainly with
reference to some additional rules that are required to be followed up by the establishments
responsible for the euro clearing system. with a comparative consent towards the above
presented statement have hereby specified some greater benefits of Brexit, on whose existence,
Britain is expected to prosper more under the accepted norms of Brexit in comparison to EU.
Though, it is with a prime focus upon resolving the four major issues concerning the regulatory
burden of several businesses. This can be done by either revoking or amending the swaths taken
under EU directive. On the contrary side, Dhingra and et.al. (2016), highlighted yet another
15 Ferran, E., 2017. The UK as a third country actor in EU financial services regulation.
Journal of Financial Regulation. 3(1). pp.40-65.
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concern of immigration policies in UK that are mainly in favour of only EU citizens16. However,
here exists another vital reason behind the existence of Brexit that aims at discontinuing such
biased outlook of UK’s immigration system. Beside this, trimming down the cost of membership
is also referred to yet another significant agenda behind the existence of Brexit with a final
agenda of preventing the state of disruption in the trade flows.
2.3 Impact of Brexit on Euro Clearing system
According to Matheson (2017), after the brexit, ECB has warned that as a result of
refendum, it will be really tough for the UK to stay its dominant position in the euro clearing
market17. It is because, currently, LCH alone is clearing & settling around 2/3 quarters of euro-
denominated currency transactions. Intercontinental Exchange (ICE) reported that LCH reported
an average clearing value of 573 USD billion. BOE carry out oversees clearing activities for the
euro-denominated financial instruments, however, ECB cooperate with the regulatory
framework.
As per the views of Goodwin and Heath (2016), CHs or (CCPs) are important integral
element of the financial statement that helps to minimize settlement risk18. Clearing comprises
procedure of matching buy & sell order for the financial instruments like bonds, equities,
derivatives, in contrast, settlements is considered as currency exchange processing. UK hold the
leading position in euro clearing because LCH majorly cleared euro denominated bonds,
derivatives and equities. However, brexit pose significant threats in the financial system which
will need liquidity support from the central bank. After brexit, UK could continue to clear such
16 Dhingra, S., and et.al., 2016. The impact of Brexit on foreign investment in the UK.
BREXIT 2016. p.24.
17 Matheson, 2017. Brexit impact on UK euro clearing. [Online]. Available through: <
https://www.lexology.com/library/detail.aspx?g=1215f78e-875d-425d-9ee7-
b57aae920ef3>. [Accessed on 22nd August 2017].
18 Goodwin, M.J. and Heath, O., 2016. The 2016 Referendum, Brexit and the Left Behind:
An Aggregate‐level Analysis of the Result. The Political Quarterly. 87(3). pp.323-332.
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financial instruments that are in euro currency only if there is a centralized system of regulation
for the UK founded CHs which will be liable to follow European equivalent requirement.
However, on the contrary note, ECB’s executive board member, Benoit Coeure argued
that the system will be highly challenging. Evidencing it, ESMA’s Chairman, Steven Maijoor
founded unintended consequences on the 22 non-EU CHs which are following ESMA as the
equivalent regulatory requirement, hence, it bring it necessity to revisit the EU system itself.
Even before the refendum, ECB expressed such concern associated with the euro clearing
& settlement services outside EU. ECB’s president, Mario Draghi demonstrated being a member
of European Union, ECB has full power to overlook, supervise & monitor UK-based clearing
houses to boost eurozone financial stability. Post brexit arise the need for ECB to ideally enhance
the stated level of overseeing & supervision right, however, in real practice, it will be very
difficult to implement.
In the report published by Matheson (2017), in 2015, UK won a case in the general court
of EU against ECB’s proposal which is based on the requirement that UK based clearing houses
& settlement systems needs to be relocated to eurozone for the clearing & settling of euro-
denominated currencies, termed as location rule19. Post brexit brought considerable change in the
UK’s position as now, ECB is more likely to win law suits stating that euro clearing market gains
critical importance and stated that EU based institutions must be provided with the legal rights to
overlook the financial stability of their currency.
In that case, EU court disregarded the ECB’s argument stating that without coming into
force of the location rule, ECB regulators have no right to influence CHs and settlement system
which will possibly endanger the clearing & payment system inside eurozone. Contrasting to
this, UK argued that location rule will hinder the free capital movement & services and also said
that ECB cannot implies eurozone requirement of location on the other CHs. However, in the
decisions, court did not look that whether ECB could implement the location based rule
necessary for the euro clearing.
19 Matheson, 2017. Brexit impact on UK euro clearing. [Online]. Available through: <
https://www.lexology.com/library/detail.aspx?g=1215f78e-875d-425d-9ee7-
b57aae920ef3>. [Accessed on 22nd August 2017].
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Post brexit resulted considerable political pressure and arisen the need for the EU
jurisdiction to have direct control of EU institutions. Thus, it clearly indicates that EU regulators
must be provided with the rights & necessary tools in order to support eurozone financial
stability. Implementation of the location rule will either directly or indirectly discourage outside
euro-denominated CHs. Not surprisingly, brexit could provide great exposure to the EU financial
institutions to overlook non-EU CHs also for the onerous credit risk management by imposing
capital charges. Any possible attempts by EU that will force clearing outside London might
undermine third country’s CHs benefit by the application of equivalence ruling and could
ultimately harm the resilience & integrity of EU financial market.
In the view of Tabola (2017), EU plans to give power to itself to move euro CHs far
away from London to EU and adopt a US operated model20. The financial market stated that
relocation plan will split the market, diminish the euro currency and boost the cost of trading
which will threaten the nation. ECB’s policymakers desire good control over euro clearing by
stating that it is core to the euro’s financial stability. It is just like US system in which, regulators
have direct access to the sensitive data in the LCHs who handle dollar denominated financial
instruments. In the draft, it is stated ESMA needs to handle systematically the clearing volumes
by non-EU CHs along with the system of enhanced supervision. It targeted specifically the
centralize supervision for all the houses which clear euro denominated instruments and ESMA
will be in the leading position which is implemented by ECB. Secondly, it aims to build a
equivalent system wherein a non-EU CHs will serve consumer in the bloc complying with the
rules and regulation similar to EU.
2.4 Legal & tactical evaluation of UK and EU’s regulatory authorities’ power concerned to
central counterparties
As per Lehmann, (2017) European union plans to separate euro clearing business from
London's financial sector to EU. In respect to this all the financial institution adopt a model
which operates its activity in US. It is assumed that relocation make negative impact on the
market which is spilt down after Brexit. This situation increased the trading cost by which euro's
20 Tabola, 2017. EU to tighten grip on euro clearing after Brexit. [ONLINE]. Available
Through <https://www.cnbc.com/2017/06/13/eu-to-tighten-grip-on-euro-clearing-after-
brexit--source.html>. [Accessed on 22nd August 2017].
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status was diminished in a decline rate. According to Lehmann, (2017) it is reported that such
kind force denominated the euro clearing business and shift them from London as per the volume
was decline over the year21. In respect to this, there are various kinds of euro-denominated
derivatives which were used in London. This instrument ensures the third party involvement
between two sides in trade so that they can ensure the safety and smooth completion of work.
Brexit make great impact on the share price and securities which are deal in market. It provides
some effective which is favourable and unfavourable for the economy.
According to Lamandini, Ramos and Solana, (2016) it analysed that there are many
European Central Bank and euro some policymakers want to make full control on euro clearing
because it is a source of single currency area which make financial stability after Brexit22. From
the present report, European Securities and Market Authority decided that non-clearer also have
systematic volume as compare to the euro-denominated business which introduce new sources in
a market. As per Harker, (2014) the main aim of the law is to make centralize direction which is
totally based on EU clearing house activity23. The second aim is top make equal balance between
non- EU clearer and EU-dominated which provides various services to the customers. It also
analysed that to relocate the euro clearing business in London, essential to make financial
stability. It make great impact on non-EU clearing house which gave the permission to handle
the large volumes of euro-denominated business. From the collected data, it is evaluated that
London's euro-clearing business plays an important role in the financial service sectors which
carry $900 billion a day as a notional; amount. It can be said that clearing house plays a role
21 Lehmann, M., 2017. Single Supervisory Mechanism Without Regulatory
Harmonisation? Introducing a European Banking Act and a'CRR Light'for Smaller
Institutions.
22 Lamandini, M., Ramos, D. and Solana, J., 2016. The European Central Bank (ECB)
Powers as a Catalyst for Change in EU Law, Part 2: SSM, SRM, and Fundamental
Rights. Colum. J. Eur. L.. 23. p.199.
23 Harker, M., 2014. Regulatory Gaming, Myopia and Ineptitude? Ofcom's Intervention in
the UK Pay-TV Market. Journal of Media Law. 6(1). pp.121-148.
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between parties in a financial trade market and other participant. According to draft commission
proposal, Brexit performs all the activity which provides financial stability in EU.
As per Ferran, (2017) point of view, Euro clearing create a battleground in Brexit
negotiation, which provide threat to London clearing house that they need to stop their business
in the city24. As a result, there are large number of euro-denominated derivatives are cleared in
London and Bank of England has a great responsibility to supervise the situation. In addition to
this, LCH world's largest clearing house takes three-quarters in euro-denominated derivative
which is related to the stability between two counterparties in order to protect the risk. According
to Eleftheriadis (2016), it is evaluated that EMIR is not apply to the UK if it exist completely25.
There are various kinds of Brexit and its impact on economic growth is pointed out by the
parliament. To analysis the impact on the derivatives EMIR can be analysed in Brexit for
implication of various financial services. In EU and Switzerland, there are many areas, where no
bilateral agreement can be made in a trading relationship. It can be said that Switzerland is
completely exists in EU sectoral legislations.
As per Duffie, (2014) EMIR provides for prudential regulation of central clearing
counterparties which is essential for the authorization, capital, margins of a default fund26. It also
offered the obligation related with the derivatives which are entered by the EU counterparties. It
is also responsible for the registration and supervision of the trade repositories. A clearing
obligation also applies to EU at financial counterparties and EU as non-financial counterparties
which is famous for trading in exceeds level. EMIR also provides for mitigation of risk
obligation by using OTC contracts which include contractual requirement related to the portfolio.
24 Ferran, E., 2017. The UK as a third country actor in EU financial services regulation.
Journal of Financial Regulation. 3(1). pp.40-65.
25 Eleftheriadis, P., 2016. The UK and the Eurozone After the Referendum. OUP
Catalogue. Oxford UK. pp.46-59.
26 Duffie, D., 2014. Resolution of failing central counterparties. Sweet & Maxwell. Oxford
UK. pp.28-36.
15

According to Dörry, (2017) EMIR standard can be implemented unit the Brexit as a result of
June, it shows those conditions in which policymaker and some financial institution invested
their capital in UK in a high rate27. To negotiate such kind of rate and implementing the proposal
EMIR was regulated. The European Central Bank has warned that Brexit because it will be
difficult for the UK to retain its controlling role in Euro-denominated derivatives liberation. It
can be said that after Brexit, EMIR and Mi-Fi are the strategies by which UK nation can achieve
a stable position by launching the euro-denominated derivatives as a financial instrument in a
security market.
As per Djankov, (2017) Counterparties and clearing house are the internal part of
financial system which plays an intermediary role between buyers and sellers while dealing in a
financial instrument28. By using these techniques, it can reduce the chances of settlement the risk
by ensuring the correct action. Clearing is a process in which all the financial instruments such as
derivatives, bonds, equities are to be matched and settle by implementing the procession of
exchange in the market. After Brexit condition, ECB and various EU institutions feels
uncomfortable at the Euro-denominated clearing level which make impact not only on Eurozone
but also outside jurisdiction of EU's court. All the legal rules and practices make great pressure
on London economy by giving options such as working their operation as per the EU clearing.
According to Dhingra and et.al., (2016), some political pressure also make great impact on the
action of the financial institution after Brexit29. Eurozone jurisdiction gave complete control on
EU institution which make direct command on the activity. As per Berg, (2016) point of view, it
27 Dörry, S., 2017. The geo-politics of Brexit, the euro and the City of London. Geoforum.
85. pp.1-4.
28 Djankov, S., 2017. In macroeconomic terms the initial effects of Brexit on the country’s
financial sector are modest: UK GDP may shrink by 0.5 percent and employment by 0.2
percent. These estimates are smaller than those predicted by the government prior to the
referendum. 2 In April 2016 the UK Treasury predicted declines of£ 38 billion in revenue
and up to 230,000 jobs in the financial sector as a consequence of Brexit. These effects
may materialize in the longer term.
29 Dhingra, S. and et.al., 2016. The impact of Brexit on foreign investment in the UK.
BREXIT 2016. p.24.
16

can be analysed that Brexit make great impact on the UK and London's economy. This situation
makes separate working styles between UK and London. It highly influenced the all the financial
instruments such as derivatives, bonds etc. Post Brexit make positive and negative impact on UK
economy. In positive site, it offers several opportunities such as increase the rate of interest,
value of instruments in a higher level.
As per Armour, (2017), on the other hand, it make various negative impact such job
opportunities will be decreed. London has to be forced to work as per the norms of UK's
financial institutions30. Separation of both of the two nations, decreases the power of euro-
denominated clearing house which gives complete and direct control to the policy maker. In
respect to this, various legal rules and law are propounded such EMIR, MiFI which offers great
contribution to stable the economy. By using this rules and regulation make positive impact for
the growth of an economy. As per the research, it can be analysed that Brexit impact make
negative role that up to 100000 UK jobs were at risk. It also develop the UK nation by increasing
its market share. As a result, nation makes great market approach after facing the Brexit
situation. Hence, it can be said EU’s euro clearing Brexit threat which never happen and not
faced by the country. The economic effects of Brexit were a major area of debate during the
Referendum on UK membership of the European Union, and the debate continues after the
Leave vote. It can be said that it make great contribution on foreign investment, property market
and stock market or currency by an appropriate manner.
30 Armour, J., 2017. Brexit and financial services. Oxford Review of Economic Policy.
33(1). pp.S54-S69.
17

CHAPTER – 3 RESEARCH METHODOLOGY
3.0 Introduction
In every research, it is necessary to apply a systematic, coherent and justified plan that
will enable scholar to get the expected deliverables. The methodology section of the thesis
presents the way how researcher has applied necessary research tools and techniques to
successfully complete the entire investigation. This chapter outlined the chosen research strategy,
design, data collection & analysis tools along with the justified reasons.
3.1 Research philosophy
Philosophy of the investigation detailed out the source of data, nature & knowledge
development. The choice of interpretivism and positivism paradigm is influenced by the practical
implications. It is because, positivist researchers seeks applying highly structured framework to
measure quantitative dataset concerning the study31. In contrast, interpretivist investigators make
use of qualitative facts, figures and information to examine the issue in detail.
31 Fiegen, M. A., 2010. Systematic review of research methods: the case of business
instruction. Reference Services Review. 38(3). pp.385–397.
18

(Source: Garner and Scott, 2013)
The thrust of the research is to examine legal & tactical analysis regarding competing
regulatory power of both the UK & EU concerned with CCP. It seems a nature of qualitative
research wherein scholar has put efforts with the aim to examine that how post-brexit will result
in a battle for controlling euro clearing to promote financial stability. Therefore, interpretivism
paradigm has been used for examining key legislations like EMIR, MiFI and others for
evaluating the post brexit rights of both the countries regarding CCP.
3.2 Research approach
Research scholar can investigate the research issue either by designing questions or
hypothesis to solve quantitative issues. Out of deductive & inductive approaches, prior also
called top-down draw a convincing and justified conclusion through logical results founded in
the hypothesis testing during the study32. Contrary side, later crate a generalized theory or
32
Flick, U., 2011. Introducing Research Methodology: A Beginner's Guide to Doing a Research
Project. SAGE.
19

concept hence, termed as bottom-up approach which is applied for the qualitative issues wherein
questions are being framed. It stimulates scholar’s cognitive skills and boost learning.
Current study has applied inductive approach because it moved from specific concept of
post brexit’s results on euro clearing to a generalized concept of centrally controlled system.
Following the approach, investigator has analyzed that how leaving out decisions of UK from
EU membership brought uncertainties in the euro clearing market and how it affects LCH’s
dominant position in concerned field. Researcher put considerable amount of efforts in
examining both the nation’s regulatory power regarding clearing house management &
supervision so as to assure sound & smooth functioning.
3.3 Research design
Design of the study integrates multiple of research components in a highly logical &
coherent manner to investigate the question or research hypothesis33. Analytical, descriptive, case
study, exploratory, cross-sectional are several kinds of design that are being available to a
scholar. The current research targeted at investigating the impact of post-brexit on euro clearing
in a thorough manner, henceforth, analytical design perfectly matches the research requirement34.
With the application of chosen design, investigator had thoroughly studied & examined UK &
EU’s competing regulatory authority and power regarding the central counterparties in the
clearing system. Firstly, applying the design, investigator examines the dominant position of
London Clearing House in the euro clearing market by assessing that what proportion of total
clearing volume is cleared by LCH alone. Besides this, scholar investigated the regulatory
system and power of EU’s leading authority i.e. ESMA, ECB and examines the application of
centrally controlled European legislations i.e. EMIR (European Market Infrastructure
Regulation), MiFi (Market in Financial Instrument) or its equivalent rules for the non-EU clearer
also. At the same time, competing power of UK’s authorities like BOE & LCH’s rights relating
33 Fiegen, M. A., 2010. Systematic review of research methods: the case of business
instruction. Reference Services Review. 38(3). pp.385–397.
34 Gay, L. R., Mills, G. E. and Airasian, P. W., 2011. Educational research: Competencies
for analysis and applications. Pearson Higher Ed.
20

to CCP has been investigated in detailed manner. Thus, following the design, scholar had
presented a detailed contextual analysis and evaluation and helps to gain considerable insight
towards the area of research.
3.4 Research type
Research can be classified in three types, quantitative, qualitative and mixed. As name
suggests, in the first numeric figures, financial values and statistical dataset which transformed
the qualitative characteristics into quantitative terms using coding are used. It is analyzed
through applying logical tools like statistical methods and financial tools to explore the hidden
pattern. However, in qualitative, researcher uses non-numeric figures to conduct a detailed
investigation. Such scholar often uses interviews and unstructured observation for investigating
the dataset of qualitative nature. It is based on various doctrines, principles & discipline35.
However, mixed method uses both the numeric & non-numeric data set to gain an in-depth
insight towards the targeted research area.
Examining the impact of post-brexit in context to euro clearing targeting legal & tactical
evaluation supported the application of qualitative research. However, assessing LCH’s leading
position in the euro clearing along with some statistical evidences supports the use of numerical
values. Therefore, it becomes clear that the study followed mixed method wherein to a large
extent, although the issue has been investigated qualitatively, still, the empirical & contextual
analysis has been adequately supported and evidenced with the available statistical facts &
figures36. It overcome the limitation of quantitative research wherein results necessarily do not
always avail explanatory description regarding the selected phenomenon. However, qualitative
studies support in-depth contextual analysis to conduct a thorough investigation.
35 Garner, R. and Scott, G. M., 2013. Doing qualitative research: designs, methods, and
techniques. Pearson Education.
36 Goddard, W. and Melville, S., 2004. Research Methodology: An Introduction. Juta and
Company Ltd.
21

3.5 Data collection
Gathering required volume of dataset relating to the target phenomenon is really
important because it have a direct influence over the research outcome. Data collection is not
only about acquiring enough & sufficient dataset but also needs to obtain quality dataset which
perfectly tailor researcher’s specific requirement. There are two popular sources from where data
can be extracted that are primary & secondary. First source need to perform totally a new
research through distinctive means like questionnaire survey, interview of the target people, field
observation etc. Not surprisingly, the process takes much time and need high cost in data
collection procedure, still, it delivers highly qualitative & trustworthy information that helps to
meet out research target & objectives37.
On the contrary side, secondary research also termed as desk research do not require any
survey or observation as data is being collected from the existing sources i.e. research papers,
articles, published reports, newspaper publications and others. Moreover, in the technological
era, internet becomes a good source of extracting needed information38. Investigator must take
necessary precaution while obtaining information from the secondary sources such as collection
of timely updated information and use copyrighted sources only which provide highly precise set
of information.
In the selected area of the study, all the needed information has been gathered from the
secondary sources only. In this, dataset regarding the key legislations i.e. EMIR, MiFI, ESMA
has been obtained from the published articles and web publications to examine that how the legal
policies influenced EU’s regulatory and supervisory power towards CCP. Apart from this,
regulatory authority’s reports like ECB’s report will be used to investigate the issue. As brexit
has resulted recently, therefore, undoubtedly, the drawback of outdated dataset in secondary
research does not exist. By extracting necessary information from the secondary sources, scholar
37 Gay, L. R., Mills, G. E. and Airasian, P. W., 2011. Educational research: Competencies
for analysis and applications. Pearson Higher Ed.
38 Goddard, W. and Melville, S., 2004. Research Methodology: An Introduction. Juta and
Company Ltd.
22

can critically analyze the competing power of UK and EU with regards to CCP in detailed
manner.
3.6 Data analysis
Analysis and examination of gathered data set is the second step after data obtaining. The
process aims at finding out the hidden pattern in the derived data that provides important and
materialistic insight towards the chosen research field. The choices of analytical method highly
based on the nature & purpose whether the data is quantitative or qualitative. It is because,
qualitative researches applies thematic analytical technique by designing themes which explore
the data pattern. In contrast, quantitative data is often examined through performing statistical
and financial tests like correlation, regression, descriptive statistics etc.
The chosen research subject is highly qualitative, henceforth; thematic approach by
designing various themes exploring the hidden pattern has been presented. Each & every
designed theme will be discussed & examined thoroughly & deeply to reveal important insight
towards the chosen area. With the application of the method, impact of brexit on euro clearing
along with the nation’s regulatory authorities relevant to the central counter parties has been
studied to get desired research outcome.
3.7 Reliability & validity
In order to extract reliable information, data has been obtained from the copyrighted sites
which authenticate the reliability of dataset. Thus, extracting needed set of information from the
authentic website and published regulatory authorities reports provides highly authentic & valid
nature of data for making contextual evaluation39. As said earlier, that UK recently voted to leave
EU membership therefore, all the available secondary sources are timely updated which mitigate
the possibility of using outdated data.
3.8 Ethical implications
As in the study, data findings & discussion undertaken through secondary sources,
therefore, all the material has been properly cited and referenced to assure credibility. The
39 Flick, U., 2011. Introducing Research Methodology: A Beginner's Guide to Doing a
Research Project. SAGE.
23

information has been fully evidenced with the necessary facts & figures for the ethical
compliance40. Scholar also had taken approval from the authorities to access those websites
which are not freely available for access. Besides this, privacy & confidentiality aspects have
been fully adhered by protecting the collected dataset.
3.9 Limitation & strategy followed to overcome obstacles
The key concern in the conducted secondary research is the lack of sufficient
materialistic information, as on the chosen issue, very few numbers of studies has been
performed since today. Besides this, several online material sources were not freely available for
use which makes it difficult for the scholar to study the issue. The obstacle has been resolved
through acknowledging the original authenticity and ownership of data by taking written
permission for the purpose of ethnical clearance. In addition to this, scholar focused on collecting
adequate plus relevant data sources that are enough for the purpose of the study. Apart from this,
giving respect to data safety & security, information has been kept in a safe place where
unauthorized party cannot access it and also to combat the risk of destruction & accidental loss.
Concerned to this, researcher followed Data Protection Act while doing the study. Lastly, in the
quality investigation, reinterpretation may also sometime challenging that raises ethical concerns,
henceforth, in order to avoid it, researcher had paid specific focus to eliminate subjective
biasness by targeting objectivity.
40 Gay, L. R., Mills, G. E. and Airasian, P. W., 2011. Educational research: Competencies
for analysis and applications. Pearson Higher Ed.
24

CHAPTER – 4 DATA FINDINGS AND ANALYSIS
4.0 Introduction
The current chapter of thesis will provide important facts & figures in the concerned area
along with the detailed analysis & interpretation. In this, data is being extracted through
secondary sources and examined and evaluated through thematic test to critically examine &
analyze the hidden and unexplored facts to assess that how brexit might leads to bring instability
in the EU’s financial system via influencing euro clearing market.
4.1 Data findings and presentation
Dominant position of London in the Euro clearing market
European Union Commission presents that UK’s largest clearing house, LCH processes
an extreme size of market in euro denominated financial instruments evidenced by stating that
London alone processes about 3 quarter of the trade volume. London plays a pioneering role in
euro clearing which clear around €1 trillion (£880 billion) just in a day while in New York, it is
just £400 bn which makes LCH as the global centre in the Britain’s financial sector41.
41 Rankin, J., 2017. Brussels plan could force euro clearing out of UK after brexit.
[Online]. Available through: <
https://www.theguardian.com/business/2017/jun/13/brussels-euro-uk-brexit-eu-
business>. [Accessed on 23rd August 2017].
25

(Source: Batsaikhan, 2017)
Looking to the graph, it is clearly observed that UK alone holds a considerable volume
of OTC foreign exchange market denominated in euro with a daily turnover of €1,009,345
million however, in US, France, Switzerland and Singapore, it is reported to €395,495m,
€106,782m, €96,710m and €77,089million respectively.
26

(Source: Batsaikhan, 2017)
Clearing houses operating in UK clear approximately 75% of interest rate derivatives that
are denominated in euro currency. Evidencing from the above illustrated graph, in the OTC
interest rate derivative, UK alone reported a daily trade volume of €927,840 million whereas US,
France, Germany & Denmark trade only €27,090m, €141,245m €48,096m, €88,125m.
27

(Source: Batsaikhan, 2017)
This particular graph illustrates that LCH’s SwapClear daily trade volume comprises a
major trade via interest rate swap, overnight indexed swap and forward rate agreements to
€187,282m, €160,492m and €121,776m. However, basis swap, Zero coupon swap, variable
notion swap and inflation swap contributed only €2,000m, €1,702m, €4,278m and €1,705m
respectively which proves the dominant position of UK (offshore CCPs) for the euro-
denominated currency transactions42.
42
28

Brexit consequences on the dominant position of LCH and its trade volume
LSE (London Stock Exchange)’s head brought attention into the concerned field and
stated that failure to process and clear such a big amount of £880 billion within a day pose
threats on around 100,000 jobs in the country. As a result of refendum, London might lose £880
bn trade volume a day as EU needs more power to relocate.
In the views of City of London Corporation’s chairman, McGuinness, EU regulatory
authorities and existed CHs are not simply accountable for the clearing process that UK based
CHs do every day. However, US regulatory authorities are not even struggling and
recommending that dollar clearing needs to be repatriated from London, still, a significant
proportion of US dollar is traded and cleared in London worth $2.1 trillion (£1.6 trillion) just
within a day. The reason behind this is US regulators have direct access to the sensitive data in
the overseas clearing houses who handle dollar denominated financial instruments.
Impact of brexit over the legislation & regulatory requirement on London based clearing houses
As a result of brexit, EU Commission presented a draft law to assert direct oversight
control to bloc’s regulators over London based clearing houses that bring it necessity for the
overseas CHs to move from UK to EU to maintain their trade volume. Relocation requirement
warn against considerable skyrocketing cost along with a significant number of job loss in the
city of London. It also helped both the UK & EU preparing for the divorce negotiation that is
going to commence on 19th June. Weber (2017), reported a price growth of 3.9% in the London
trading house (LCH) which were earlier reported to 3.2%. Deutsche Boerse’s CH rose up by
0.4% in Frankfurt43. Considering the mentioned findings, proposal stated Paris based ESMA will
Batsaikhan, U., 2017. Brexit and the UK’s euro denominated market, the role of clearing
houses. [Online]. Available through: http://www.globalbusinessoutlook.com/brexit-and-
the-uks-euro-denominated-market-the-role-of-clearing-houses/. [Accessed on 23rd August
2017].
43 Weber, A., 2017. Brexit: EU Pushes ahead with plans to take control of London’s
clearing businesses. [Online]. Available through:
http://www.independent.co.uk/news/business/news/brexit-latest-news-eu-london-
29

have right to decide that which of the CHs needs significant amount of direct supervision &
control. If they considered location needs, then, commission & concerned central bank holds
power to bring the decisions into practical application. ESMA plays a great role in regulating
non-EU clearers comprising supervision, trade repositories, CCP & enforcing credit rating.
International Swaps & Derivative Association (ISDA)’s service policy chief named
Valdis Dombrovskis examined the data of about 11 banks and exhibit that clearing of interest
rate derivatives by EU clearers will boost the margin beyond 20%. In contrast to this, ISDA’s
executive chief, Scott O’Malia argued that forced relocation needs will probably maximize the
capital requirement for EU based CHs and ultimately, it will be recovered through clients in both
inside and outside EU which make it really expensive to hedge risk. Looking into the area,
Future Industry Association (FIA) for the futures, derivatives and options in Washintonb implies
that forced relocation plan will raise the margin need from £83 bn to £160 bn. Chapman (2017),
grab attention over the EU’s relocation strategy to relocate the business with the notional value
of £810 bn (€930 bn) non-EU clearers inside EU in the post-brexit which might be detrimental
for the Europe’s economic interest.
Despite this, LSE’s Chief Executive Xavier Rolet mentioned that proposed location plan
might pose a cost of €100 bn (£83 bn) on investors over a period of 5 years. LSE’s CH clear
around 18 multiple currencies & such netting efficiencies saved around £21 bn capital in the
historical year. At the same time, shifting the UK operations inside EU will result in fragmented
market and make it less efficient because of the loss of around 100,000 jobs (Chapman, 2017).
Thus, in views of Michael Spencer closing euro clearing in the London could threaten both the
UK as well as EU and the repatriate proposal is just like a piece of protectionism & economic
nationalism44. Therefore, EU officials decided to limit the volume of euro trade that is processed
in New York in order to place restriction on the London’ CHs. ECB believes that they must be
clearing-business-euro-derivatives-commission-plans-european-union-a7787186.html.
[Accessed on 23rd June 2017].
44 EU-Managed Control Of Euro Clearing Is Not Viable'. 2017. Available through:
<https://webcache.googleusercontent.com/search?q=cache:o1tU8P_Dm-YJ:https://
www.ft.com/content/64f5d320-3403-11e7-99bd-13beb0903fa3%3Fmhq5j
%3De4+&cd=2&hl=en&ct=clnk&gl=in> [Accessed on 11 August 2017]
30

work under the direct supervision of eurozone to reduce the possibility of weakened financial
stability.
4.2 Analysis and interpretation
Dominant position of London
From the findings, it becomes clear that dominant position of London in the euro
clearance shed light that brexit not only bring financial uncertainties for the euro currency but
also will have a considerable impact on the UK’s leading position as it post threats over the
leading position of UK. Enlightens the focus upon it, it becomes necessary for ESMA to
implement a system of closer supervisory system on the clearing houses outside EU who is
clearing & handling a significant volume of financial instruments denominated in euro currency.
The steps will either force UK based CHs to shift their clearing operations from London to EU
after refendum (called relocation) or helps to establish a centrally controlled framework in which
outside CHs will have to follow the same rules & regulations that are followed in EU to boost
financial integrity45. Brussel’s Director, Guntram Wolff stated that such political step will force
London’s CHs to relocate their clearing operations inside EU and undoubtedly, the relocation
strategy will be definitely prove as a negotiation instrument.
However, on the other side, there are some downfall side of the relocation requirement
evidencing it, ICE paper clearly stated that relocation leads to raise cost for London banks which
will damage liquidity. It is because; it might lead to fragment the market by raising cost for the
final users & threaten the European financial stability46. In The Times, Xavier clearly mentioned
that moving euro clearing operational activities from London to EU will raise the level of
45 Chapman, B., 2017. Brexit: Stripping London of £800 bn clearing businesses could cost
investors £80 bn, says LSE. [Online]. Available through:
http://www.independent.co.uk/news/business/news/brexit-latest-news-london-strip-800-
billion-cost-investors-london-stock-exchange-boss-xavier-rolet-a7748991.html.
[Accessed on 23rd August 2017].
46 Burton, L., 2017. Euronext Boss: City will Lose euro clearing battle. [Online]. Available
through: http://www.telegraph.co.uk/business/2017/05/19/euronext-boss-city-will-lose-
euro-clearing-battle/. [Accessed on 28th August 2017].
31

systematic risk & cost for the local companies by diverting capital away from the economy of
Europe. Not only the bank but also customers will be affected from the same because in order to
recover the high cost, bank will charge high margin47.
Stephane also stated that in the post-brexit, UK is likely to lose its euro clearing battle
because an extreme proportion of clearing trade in UK is likely to relocate inside EU. Market
participants i.e. LCH, ICE clear and CME clearing fear prospective fragmentation of euro-
denominated swaps and derivatives if necessary agreements are not made (Parsons, 2016).
ISDA’s head, Scott O’Malia said that although progressive results can be seen between US &
Europe’ CCP equivalence, still, it needs a lengthy time.
In near future, MiFID rules are about to come into force to implement mandatory trade
requirements, as per which, swaps will be trade on MTF & OTF (multilateral trade facilities &
organized trade facilities). Post-brexit expects from Europe to follow a similar model in the swap
execution facilities and agree on allowing cross trading without any requirement of increasing
cost under relocation.
Legal & tactical issues in relocation proposal
The issue of euro clearing battle is not new as in 2011, ECB raised concern towards
major euro based financial market infrastructure located outside EU and came into a single
eurosystem oversight policy framework Offshore CCPs whop settle and clear a big amount of
euro-denominated instruments are extremely important for the euro area therefore, it is necessary
for the EU regulators to legally incorporate the overseas CHs in the euro area with having full
operational & managerial control. In response to the relocation plan under Oversight Policy
Framework of EU to regulate offshore CCPs, UK government contended that it directly violates
the requirement of Treaty functioning of EU (TFEU). Henceforth, ECB has no right to impose
such legislations on the UK based CHs because it breaches free capital movement, freedom of
establishment and freedom to deliver services. In 2015, GC (general court) favoured UK
47 Cremades, M. T., 2017. Brexit and the European Union: General Institutional and Legal
Consideration. [PDF]. Available through: <
http://www.europarl.europa.eu/RegData/etudes/STUD/2017/571404/IPOL_STU(2017)57
1404_EN.pdf>. [Accessed on 11th August 2017].
32

regulators and said that in order to get rights over London based CHs; TFEU needs to be
amended prior.
Impact of brexit over uncertainties in the financial sector
As per the findings, it is examined that post brexit pose significant threats in terms of
regulatory uncertainties on UK’s financial sector. Refendum resulted loss of passport rights &
delays around renegotiation under the uncertain regulatory environment might trigger huge
change in euro denominanted market for the UK based CCPs such as possibility of shift from
UK to the continent. Moreover, being a non-EU clearer, it is of no means to enforce ECB so as to
credibly commit the agreement of liquidity swap and such legal uncertainties might results in
liquidity crisis48. Therefore, in order to manage such risk, ECB has announced Oversight Policy
Framework in which the regulators cleared that outside clearing operations are the part of
systematic risk for euro zone and it is not possible to determined that whether ECB will impose
location requirement or amend TFEU to seek explicit competence regarding the clearing
market49.
Eurosystem oversight policy framework
In the euro economy, payment, clearing & settlement facilities plays really a significant
role in boosting efficiency & stability of the financial system. Moreover, monetary policy
implementation, in which, central bank control the money supply in the nation targeting
country’s inflation rate greatly depends upon the reliable, sound and effective European Market
48 Weber, A., 2017. Brexit: EU Pushes ahead with plans to take control of London’s
clearing businesses. [Online]. Available through:
http://www.independent.co.uk/news/business/news/brexit-latest-news-eu-london-
clearing-business-euro-derivatives-commission-plans-european-union-a7787186.html.
[Accessed on 23rd June 2017].
49
'ECB In Drive To Control Post-Brexit Euro Clearing'. 2017. Available through:
<https://webcache.googleusercontent.com/search?q=cache:UIMkjUwUQWkJ:https://
www.ft.com/content/8888e560-57e5-11e7-9fed-c19e2700005f%3Fmhq5j
%3De4+&cd=1&hl=en&ct=clnk&gl=in> [Accessed on 11 August 2017]
33

Infrastructure Regulations (EMIR). Supervision of payment & settlement services by closer
supervision of the system and introduce necessary changes aims to promote efficiency & manage
risk i.e. credit, liquidity, legal and operational. Before brexit, London existing CCPs were
directly under the control of EU, however, in the event of brexit, it arisen concerns among
regulators as they have not as much as oversight rights over UK’s CHs50.
In response to the same, EU Commissioner, Dambrovskis provided that there are three
options for the offshore CHs that are (1) to create a regulatory system in UK that is equivalent to
the existing EU’s legal & regulatory framework (2) designing extensive policies in London for
regulating CCPs or (3) to force them to clear the euro denominated currencies inside eurozone
(location). As per EMIR regulation, certain specific assets only can be transacted via CCP which
purposes at assuring smooth market continuation in case of default by counterparty. CCPs follow
margin requirement, default management and recovery plans for the risk mitigation. It works
together with the BRRD (banking resolution & recovery directive) for managing risk via initial
margin, default fund and variation margin51. In the light of brexit, trillion of euros are cleared in
London. In the proposal presented by EU in post-brexit for euro clearance, it will split the CCPs
into two tiers depending upon the requirement that whether operations are considered as
“systematically important” or not. If not, then all the clearing houses of London have to work
under the EMIR rules & regulations52. However, tier two has to follow other legislative
50 Tabola, 2017. EU to tighten grip on euro clearing after Brexit. [ONLINE]. Available
Through <https://www.cnbc.com/2017/06/13/eu-to-tighten-grip-on-euro-clearing-after-
brexit--source.html>. [Accessed on 22nd August 2017].
51
Stretch, K. Bielkowicz, K. and Parker, C., 2016. European Derrivative Regulations in Post
Brexit World. [Online]. Available through: <
https://staging.paulhastings.com/publications-items/details?id=6409ea69-2334-6428-
811c-ff00004cbded>. [Accessed on 28th August 2017].
52 Batsaikhan, U., 2017. Brexit and the UK’s euro denominated market, the role of clearing
houses. [Online]. Available through: http://www.globalbusinessoutlook.com/brexit-and-
the-uks-euro-denominated-market-the-role-of-clearing-houses/. [Accessed on 23rd August
2017].
34

requirements too which is designed by ECB such as “on-site inspection” and also provide all the
materialistic and relevant information to the EU regulator, ESMA. These requirements may not
be sufficient for the clearing houses recognised as “substantially important” hence, might be
force to come back inside EU. The proposal will go to Europe Parliament & EU council for
acceptance while in the argument, London Corpoation Council’s chairman argued that such
fragmentation of forex & rate of interest leads to maximize trading cost by 20% or beyond. UK
is the only place which provides services at minimum possible cost and renders economic
efficiencies; however, the relocation will probably maximize systematic risk. EU proposal stated
that CCPs which were determined as systematically important needs to accept direct oversight
policy of EU as per which, EU regulators will have direct access to all the sensitive information
of offshore CHs53. Observing the concerned facts, EU expressed concern over shared regulation
between UK & EU for the financial stability and euro clearance battle negotiation.
Critical reflection
The success of the research definitely influences by the selection of chosen research
design, strategy, data collection and theoretical framework. The study was based on inductive
design and interpretivism paradigm which facilitates researcher to make thorough examination of
the battleground of euro clearing in the event of brexit along with the detailed analysis of
legislation and regulatory requirement. However, on the other side, the conducted research study
was based on the secondary data collection henceforth; there were some difficulties encountered
during the study due to unavailability of sufficient data set and moreover, some sites are not
available for free access, still, if the primary research was conducted for the given investigation
that regulators needs to be surveyed who will provide their response which we already
discovered from the secondary data set. Therefore, the chosen data gathering method was
founded effective for the given issue. Despite these, as researcher has examined both the
quantitative & qualitative data set following thematic test is founded perfectly suitable to
53 Rankin, J., 2017. Brussels plan could force euro clearing out of UK after brexit.
[Online]. Available through: <
https://www.theguardian.com/business/2017/jun/13/brussels-euro-uk-brexit-eu-
business>. [Accessed on 23rd August 2017].
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discover hidden pattern of both the numerical & non-numerical dataset. In addition to this,
scholar gave considerable importance to ethnicity by taking permission to access important sites
so as to obtain enough set of data set for investigating the issue in detailed analytics manner
helps to reach the justifiable conclusion. By gathering argument information from both the UK &
EU regulator’s perspective in respect of euro clearing battleground, scholar gave full importance
to the objectivity aspect and accomplished the study successfully. However, still, every
researcher can interpret the findings in different manner which might affect the research outcome
to a few extents.
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CHAPTER -5 CONCLUSION & RECOMMENDATIONS
Conclusion
The results drawn concluded that Post-brexit will lead to pose significant threats for both
the UK and EU. It is because; London is the world’s leading market which is clearing about 2/3rd
means 75% of the total EU trade volume. London plays a pioneering role in euro clearing which
clear around €1 trillion (£880 billion) just in a day. Thus, refendum will probably bring financial
risk in the euro clearing and also threaten the UK as it will lose a significant euro trade volume
that its clearing house clear every day. In order to maintain financial integrity and smooth
functioning of the financial sector in post-brexit, EU proposals stated three possible choices to
manage offshore CCPs in the UK that are to design either two tier equivalence system or
extensive regulatory framework or force UK CHs to shift their clearing activities inside the
continent. All these aims at implementing enhanced and closure supervision on the London
based clearing houses so that EU regulators have direct oversight controlling power and
supervision authorities over margin and other clearing activities. It will facilitate regulators to
implement a centrally controlled framework with regards to euro clearing both the inside and
outside EU.
The proposal is still under the parliament to pass and in response to the same, UK
Chairman contempt that relocation strategy will leads to boost competition, market
fragmentation, increase systematic risk, liquidity crisis, reduce netting and results in a big
proportion of job loss as currently the clearing houses employed around 100,000 people. Not
only the UK but also EU will be affected adversely from the location need because it will
weaken the euro currency and maximize the capital requirement for the EU based CHs. Besides
this, if UK based CCPs shifted inside EU then they will cover incurred cost from the customer
which make the clearing operations costlier for the final users and mitigate the economic
efficiency benefits for the customers which they are currently receiving in UK. Despite this,
there are some legal restrictions also because relocation plan breached the freedom of offshore
CCPs, and in order to bring such requirement in real world, TFEU needs to be amended on prior
basis.
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On the other side, those CHs who are not deemed systematically important can continue
their operations just by following EMIR policies, rules and regulations along with several
additional requirements such as on-site inspection and disclosure of relevant information to the
EU regulators for the purpose of enhanced supervision, however, systematically important CHs
would need to either accept direct oversight or relocate their business inside EU. Thus, it
becomes clear that brexit brought the possibility of catastrophic impact on both the nation in the
battleground of euro clearance. At the same time, if enhanced supervision system does not
effectively work then relocation is a last solution to given problem on which final formal
approval will be given by European Commission for maintaining financial integrity.
Recommendations
From the research outcome, it becomes clear that un-doubtedly, brexit brings significant
threats to both the nation and in order to promote financial integrity, ECB needs to design a new
framework so as to have direct control, oversight and supervision over London based clearing
houses so that nation can implement a centrally controlled framework. In accordance with the
equivalent legislative framework, all the CCPs either inside or outside EU will charge same
margin, follow same laws and regulations under default management & risk mitigation practices.
EMIR’s equivalence system must be designed upon the legal, supervisory and enforcement
arrangement comprising clearing, reporting and risk mitigation techniques adopted by offshore
clearing houses.
In addition to this, as the research identified that clearing houses who clear a big
proportion of euro denominated currency and deemed substantially systematically important
needs to relocate their business in the EU, henceforth, EU regulators must offer the benefit of
low taxation rates & light regulations to the relocators so that they will be motivated to move
their clearing services inside EU. By following an equivalence system and closure control
system, ECB, ESMA and other EU officials can tight their grip over offshore clearing houses. In
addition to this, EU regulators can design a shared regulatory system between EU members and
UK under the shared agreement for assuring a sound functioning of the financial sector without
any threaten of weakening currency and liquidity crisis and to win the negotiation process
concerned with euro clearing battleground. In response to the same, BOE said that they are ready
to work under the coordinated approach in order to achieve the common defined objectives of
financial integrity, stability and sound functionality of the financial market infrastructure.
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In the future, scholars who want to investigate the issue in detail can conduct primary
study to obtain views of different market participants on the euro clearing battleground to
investigate & study the issue thoroughly. Researcher can also focus on the benefits &
shortcomings of the coordinated approach for the stability of financial sector. Researcher might
also focus core attention on a specific area such as equivalence system designed by EU officials
and to examine its potential impact over the UK and EU. By investigating the issues, scholar can
put focus on the through and detailed evaluation of the key legislator requirement and assess that
how it will influence the euro clearing battleground.
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