Cautious optimism for City of London ahead of Brexit negotiations

Miles Celic, Chief Executive Officer of TheCityUK Credit: ITV News

One of the anxieties that has spread since we voted to leave the European Union is that the twenty-seven countries we bid farewell to would seek to cause us economic harm in a parting act of retribution.

The defenestration of the City of London - a place where the EU and much of the rest of the world comes to borrow and lend money - has been a persistent and well-founded fear.

Days after the referendum result was announced, Francois Hollonde, then the President of France, declared that London should no longer be able to clear euro-denominated trades. Last month Wolfgang Schauble, the German finance minister, made similar noises, indicating that the "major part" of euro-clearing should be relocated to within the EU.

Clearing houses sit in between the buyer and the seller in a transaction, essentially they exist to mitigate the financial impact of a deal falling apart. The derivatives contracts that clearing houses insure against default include interest rates, currencies and commodities.

The chief executive of the London Stock Exchange - whose subsidiary LCH Clearnet is one of the biggest players in London - warned up to 100,000 jobs would be lost if the EU took euro-clearing in-house.

The Bank of England had indicated the relocation of euro-clearing would make regulation of financial services harder and was also likely to drive up costs for companies and therefore prices for consumers.

The City of London Credit: PA

In the event, the European Commission has decided euro-clearing can continue in London for the time being on the condition that the EU gets greater regulatory oversight and the Bank of England accepts joint supervision with ESMA (The European Securities and Markets Authority).

On the face of it a great victory for compromise over conflict. It's tempted to see this as "The City of London Saved" and proof that common ground can be amicably found as Britain begins the process of separating itself from the EU.

But the European Commission also confirms that "in specific circumstances" and "as a last resort" it retains the right to insist on the relocation of euro clearing with the ultimate decision taken with "the agreement of relevant central bank".

Which in one sense depoliticises an economic decision. But here's the rub: the "relevant' central bank in this instance is the European Central Bank - not the Bank of England. Which matters a great deal because in 2011 the ECB tried to limit euro-clearing in London only to be thwarted when the British government challenged the move in court.

The Commission's announcement has been cautiously welcome in London. It's right to be cautious. With an opt-out like this the residency status of euro-clearing in London may prove temporary.