Speech by Policy Chairman Catherine McGuinness - Futures Industry Association, ‘Brexit in a Day’, 16 May 2017
FIA ‘Brexit in a Day’
Chairman of Policy and Resources
On behalf of the City Corporation can I begin by welcoming you to the Square Mile.
I am particularly pleased to be speaking at this FIA conference. As a derivatives lawyer, I have seen for myself the good work of this organisation.
Some of you may have seen two different monuments on the way here. Just down the road, the giant column built to commemorate the Great Fire of London, 350 years ago.
And just across the road, the more eagle-eyed among you might have spotted the 34-storey, 160 metre tall Walkie-Talkie – a monument to London’s current status as the world’s financial capital.
They are separated by style and by centuries. But they stand together as symbols of London’s most enduring, most valuable qualities. Qualities that have kept London at the cutting edge of world trade for hundreds of years. Through war, depression and disaster. Endurance. Adaptability. And resilience.
That quality is about to be tested once again. None of us are under any illusions. Brexit won’t be straightforward. This event may be named ‘Brexit in a Day’, but in reality it’ll take a little longer than that.
The sheer complexity of disentangling the UK from the EU… makes it even more important that we listen to a variety of voices and views. We must avoid the kind of ‘groupthink’ that left the City so stunned on the morning of June the 24th. I’m delighted to see such a range of people on the attendance list today.
And to be here myself putting forward my own views, shaped through a career spent as a financial lawyer, from Big Bang to crash and out again as a committed European and, now, as Chairman of the Policy and Resources Committee – which puts me in charge of the City Corporation’s strategic direction.
That experience gives me a pretty good overview of a City that is, and will remain, the world’s leading financial hub. Before we touch on Brexit, it’s important to recognise that the qualities which underpinned London’s rise are as resilient as ever.
Our Rule of Law. Our responsive regulation. Our unique cluster of collaborative sectors. Our adaptability. Our language. Our beneficial time zone. Our uniquely deep pools of capital and talent. These will not disappear.
The UK’s financial and professional services benefit people in the EU and beyond: through infrastructure funded, pensions invested, products invented, and startups supported.
From young children to pensioners and from the largest international corporates to the tiniest cottage industry, financial and professional services change lives.
We want to avoid disruption and fragmentation which could hinder jobs, growth and prosperity around the world. Which could increase costs and snarl up services everywhere. That’s why it’s in everybody’s interests that Brexit negotiations end up with three main outcomes.
The first outcome is a bespoke deal delivering mutual market access between the UK and the EU. Such a deal, underpinned by mutual recognition and regulatory cooperation, should maintain the same mutual market access rights that we and EU 27 currently enjoy. It’s worth noting that none of the ‘off the shelf’ deals, like the Norwegian or Swiss models, offer the access vital for sustaining growth across the continent.
The second outcome is early agreement of the nuts-and-bolts of the process for Brexit, including transitional arrangements. A non-disruptive Brexit will rely on sensible temporary arrangements, such as a bridging period. This will ensure continuity and protection for clients of all types.
The third outcome is continued access to talent. We cannot pull up the drawbridge in front of talented people who want to come and contribute to UK-based financial services. And we support the government’s aim to maintain the residency rights of EU nationals as early as possible. So a bespoke deal, a smooth Brexit and access to talent. Our three priorities for the Article 50 negotiations.
But I’m equally clear that negotiation is a two-way street. And to paraphrase JFK, we in the UK shouldn’t ask ‘what can the EU do for us’ but ‘what can we do for the EU’. This is a fundamentally important point.
Of all the pitfalls that lie ahead, surely one of the most dangerous would be misunderstanding the EU itself. Seeing it as a commercial marriage of convenience or an international chain-store. If we’ve learnt anything over the past year, it should be that the principle of EU integration is formidable.
It’s a principle forged in the ashes of the Second World War. An attempt to create a brighter future for an entire continent. These beliefs won’t be put aside. Nor should they be.
So we can get a good deal. A deal that works for Britain. But only if it also makes lives better, easier and more productive across the continent. London’s financial and professional services are the key to that deal.
Because our position as the world’s financial capital doesn’t just benefit the UK. If the crisis taught us anything, it’s how interconnected we all are.
You can’t just lop bits off. We’re Europe’s gateway to finance. London’s position means more choice, more consistency and more competition for clients across the continent and beyond. Our capital markets enable investment in infrastructure and technology. Our retail and institutional asset management industry multiplies pensions and assets.
And our position as a truly global capital market reduces the cost of finance for European corporates. And that’s why the nature of the Brexit deal is so important.
So: what does all that have to do with the FIA? Or with the futures, options and derivatives markets more generally? It’s because this market is an absolutely classic example of why it’s so important to handle Brexit the right way. A way that avoids fragmentation that could stunt growth and increase risk across the EU27. A way which avoids unnecessary shocks to the operation of the markets.
Let me take two examples. In a moment I’ll touch on the work involved in the actual exit – wherever it might end up. Specifically, repapering of contractual arrangements. You might expect me as a lawyer to take an interest in that.
But first, take clearing of euro denominated derivatives.
I think it’s fair to say that most people outside the industry don’t actually know what clearing is. But what they do know is that one trillion dollars each and every day – the size of the industry – is a lot of money.
It’s natural that people want a slice of that cake. It’s also natural that countries and their central banks should be concerned about the wellbeing of their currencies. France has been particularly vocal in suggesting that for sovereignty over its currency, the eurozone should take euro clearing on-shore.
They are well within their rights to raise this.
We welcome discussion about the future of Euro clearing – just as we do discussion on every other eventuality of Brexit. Why? Because it’s an opportunity to examine the evidence and come to a dispassionate conclusion.
And in this case, all the evidence points one way: that the mass uprooting and offshoring of part of the industry – of clearing of transactions in one currency – would not only be vastly complicated, but also vastly damaging and potentially destabilising.
Markets don’t act on whims.
The reasons London is such an active hub for Euro clearing are simple. It’s because London is the global centre for clearing in multiple currencies. It’s because it’s systemically safer to centralise clearing so that exposures can be netted. It’s because it makes the posting of collateral more cost-effective. And, frankly, it’s because we’re good at it.
That’s not meant as a boast, or as a criticism of other European centres. It’s a simple expression of fact based on three key factors. We have the scale – based on handling over 70% of the daily euro clearing business. Not to mention US dollars and RMB.
We have the infrastructure. And we have the people – the expert clearing professionals themselves, but also the ancillary professionals, such as lawyers, consultants and accountants who make it all happen. Clearing is here for these reasons.
And if we split off one currency, with Euro clearing moving to, say, Paris, all we’ll see is systemic risk going up, liquidity going down, costs hitting the roof and, according to Xavier Rolet of the London Stock Exchange, a cost to banks of seventy-seven billion dollars in additional collateral.
In sum, it’d be a completely avoidable outcome.
And what’s more, it’d be a step away from the ultimate goal, which should always be ‘what is in the interest of Europe’. And indeed in the interest of the global financial system – which is why for example the CFTC is watching this issue closely.
The second example of the importance of a good Brexit is the actual work which will be inevitable whatever the ultimate destination. Repapering. That may seem a secondary issue. But it’s not.
Just look at what happened recently in the OTC market, where repapering issues have led to delays in implementation of the requirements for margin on uncleared swaps. We all know how much paperwork can be involved when new regulations or directives come in, and how long that can take, however simple it may be.
Inevitably, whatever Brexit deal is ultimately struck, adjustments will be needed to legal documentation. So put yourself in the client’s shoes.
The current situation can be complex enough, as you receive half a dozen different service options from half a dozen different providers. Add on top of that, once we are outside the EU, a number of different legal frameworks!
This time, they’ll receive your documentation just as they’re attempting to cope with a whole raft of other changes across their business.
It has the potential to get very confusing. So that’s the client side.
From the commercial side, things look just as dangerous. Across the financial sector, contract digitisation still isn’t as advanced as it should be.
So a fragmentary Brexit would mean firms face manually finding, reviewing and repapering thousands of unique contracts at the same time as any other regulatory upheaval.
And this too, in my view, wouldn’t be in the best interests of clients and corporates across the EU.
These two issues that illustrate the value of continuity, the value of stability, and most of all, the value of a Brexit deal that brings Europe together, rather than fragmenting it.
And that’s why events like this are so important. The best chance of such a deal comes when we understand the arguments when we’ve tested and re-tested them, calmly and pragmatically, in forums like this and when we’re confident in putting them to politicians, to the public and to the press.
As the general election draws near and Brexit negotiations begin in earnest that is the task in front of us.
The City Corporation and I will continue to press home those messages. Making a positive, optimistic, realistic case for stability. Not for London’s benefit.
But for the benefit of each and every one of Europe’s 500 million citizens. That is our collective responsibility. That is our collective opportunity. And we are ready for it.