February 22, 2017 / 12:29 PM / 5 months ago

UPDATE 2-BoE's Cunliffe says euro-denominated clearing should not be forced into euro zone

3 Min Read

(Adds lawmaker comment)

By Huw Jones

LONDON, Feb 22 (Reuters) - Bank of England Deputy Governor Jon Cunliffe warned on Wednesday that requiring financial instruments to be cleared in a country that uses the currency in which they are denominated would bump up costs and splinter markets.

Cunliffe said the clearing of a single pool of multi-currency instruments, as done by LCH clearing house in London, allowed the offsetting of positions to boost efficiency which "currency nationalism" would undermine.

"This reduces the costs of central clearing - costs that are ultimately borne by the real economy - as well as allowing a more efficient and effective management of the risks that brings significant global financial stability benefits," Cunliffe said in a speech in London.

"Requiring each of these instruments to be cleared in the jurisdiction of the currency in which they are denominated would simply render multi-currency central-clearing impossible."

Policymakers in the euro zone have said that clearing of euro-denominated derivatives, which LCH dominates, should be moved to the single currency area after Britain leaves the EU.

The European Central Bank failed in an attempt to move large chunks of euro denominated clearing from London to the euro zone, but is expected to try again after Brexit.

The Bank of England regulates some of the world's biggest clearing houses, such as LCH and ICE Clear Europe.

"In central clearing, in settlement, in payments if we wish to maintain the infrastructure to sustain an open and integrated global capital market, we will need to build upon the arrangements we have developed for supervisory cooperation and co-ordination," Cunliffe said.

He said "currency nationalism is not a necessary condition for either financial or monetary stability, as is demonstrated by international experience over recent decades".

If all jurisdictions followed such a policy, it would likely splinter global markets, rather than be a route to the sound and efficient management of risk, Cunliffe said.

Andrew Tyrie, chairman of the UK parliament's Treasury Select Committee, said attempts to force euro contracts to be cleared in the euro zone would be at best futile, and at worst an act of needless self-harm.

Xavier Rolet, chief executive of the London Stock Exchange Group which owns LCH, has said that if euro denominated clearing was forced to move to the euro zone it could put thousands of jobs in the City of London financial district at risk. (Reporting by Huw Jones; Editing by Alison Williams and Mark Potter)

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