With Brexit you can’t always get what you want

London Stock Exchange CEO Xavier Rolet spoke in Parliament about Brexit. Neither side can get everything it wants, he said.

As I follow the river Thames to the west, the Palace of Westminster’s famous tower becomes visible in the distance.

Cloaked in metal scaffolding, the tower that holds the Big Ben is getting a facelift in the next years.

I know it’s just an old building receiving long overdue repairs, but I can’t escape the symbolism of it happening now.

In parallel with the Brexit negotiations, Britain’s best known building is being restored to its former glory.

For the time being, tourists will have to peek through the construction works and imagine what the palace would look like without its cocoon.

In a way, the same is happening with Brexit.

Britain’s political and economic future is under construction.

While Prime Minister Theresa May and her Brexit team negotiate with Brussels, all we can do is catch glimpses of what’s going on and speculate about the end result.

It’s this very reason – speculating about Brexit’s final destination – that brings me to the Palace of Westminster.

I’m going to listen to Xavier Rolet, CEO of the London Stock Exchange. He’s speaking to Lords, MPs, and, well, me about “Transitioning Brexit for the benefit of the real economy”.

And it proves informative.

I learn that an important trump the EU is holding is actually pretty worthless. If Brussels were to play that card, it would harm itself more than its opponent.

But neither can Britain get everything it wants.

Despite the wish of the PM and hard Brexiters to keep the transition period as short as possible, they’ll have to brace for a ‘standstill phase’ that lasts more than two years.

Changing status quo in no one’s interest

If I had to sum up Rolet’s talk, I’d use the Mick Jaggerism that you can’t always get what you want.

Not if you’re Theresa May. Not if you’re a hard Brexiter. Not even if you’re the EU.

The EU has eyed London’s euro-clearing business from the moment Britain announced it was leaving the bloc.

Clearing houses play the middle man in transactions between banks and financial firms. They exist to guarantee transactions go through even if one party were to default.

As you might expect, the importance of clearing houses has increased since the financial crisis.

They make sure transactions go ahead even if a party can’t pay up. This prevents a domino effect of parties defaulting because the damage is contained to the first tile.

Earlier this year Rolet already explained the need to keep these clearing houses in London:

“London clears 18 major currencies and these multi-currency netting efficiencies meant LCH [LSE’s clearing house] saved its customers $21bn in capital last year,” he wrote in the Times.

“Strip out euro clearing and you lose these efficiencies, potentially increasing cumulative trading costs by €100bn over five years.”        

Rolet argues that breaking up these clearing houses can only be a political decision. He sees it as a reaction to Britain’s decision to leave.

However, I would like to point out that Europe’s interest in the euro-clearing business predates Brexit.

The European Central Bank already tried to move these clearing houses to the Eurozone in 2015. But the European Court of Justice backed the UK government at the time as it ruled that the ECB had no power to demand this move.

Whatever the motive, Rolet advises Brussels not to pursue this path. It would be an act of self-harm.

“The EU would not want the euro to be a global currency and instead want to put in place protectionist measures.

“It would put up barriers and cut itself off, that’s a steep price to pay.”

Last month Manfred Weber, a political ally of Angela Merkel in the European Parliament, claimed it was inconceivable that London would keep its euro-clearing business.

Rolet counters that statement.

In addition to the cost and inefficiency of moving these clearing houses to the EU, it would increase systemic risk.

“Fortunately the European Commission called moving these clearing houses a ‘last resort’ measure in June statements.

“It’s not in anyone’s interest to change the status quo.”

We need transition deal before Christmas

Rolet then brings up the transition period, which he thinks needs to be agreed soon and should last longer than media reports imply.

He stresses that a transitional arrangement needs to be made public this year to avoid an exodus of UK-based firms.

“Business needs certainty,” Rolet says as he basically repeats what he’s written in an op-ed for the Telegraph:

“Certainty breeds confidence, which allows investment in firms to innovate, grow and create jobs.”

Without clear answers about Britain’s immediate future, companies will postpone long-term investments.

Another thing is that companies can’t just pack up their stuff and move to another country.

They need to find office space, understand the legislation of another jurisdiction, research if the infrastructure is adequate and matches their needs, etc.

All of this could take years and that’s why business needs to put their contingency plans into practice if there’s no white smoke about a transition deal soon.

“We need a joint statement from the UK and the EU about a transition deal in the next few weeks, essentially this side of Christmas.”

The boards of many companies meet in the last month of the year. It’s quite possible that in these December board meetings companies cut the Gordian knot and decide whether or not they move (part of) their operations abroad.

“It is my understanding and expectation that in the first quarter of 2018 the implementation of contingency plans will start in the absence of a transition deal.”

Rolet also has bad news for the likes of Boris Johnson and Michael Gove.

Though these ‘hard’ Brexiters have reluctantly agreed a transition phase might be necessary, they want to keep it as short as possible.

The transition shouldn’t last “a second more” than two years, Foreign Secretary Johnson wrote a few weeks back.

But the LSE boss warns that Johnson and his allies fail to take into account the complicated and highly technical nature of the financial services sector.

“Financial services need a transition of about three years based on technical analysis.

“Other sectors might have less complicated frameworks and need less time to agree on.

“The two years Mrs May spoke about could therefore be an average.”

Thus concludes my visit to the Palace of Westminster.

When I step outside, I look up to its tower, surrounded by metal. Big Ben will have to stay quiet for a number of years.

The ‘construction workers’ inside the Palace of Westminster and the EU buildings in Brussels have no such luxury.

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