16 April 2021

FT letters: The reason euro swaps clearing is in London

As regards the location of euro swaps and other clearing in a wider Europe, a topic much featured in your pages, and rightly so, there is one point which should not be overlooked (“Brussels squares up to UK in fight over euro swaps clearing”, Report, March 31).

This is that the whole legal system in the jurisdiction in which the clearing system is located must be robust. The risks centred on the counterparties in these clearing systems are colossal. It is not enough just to erect a narrow legal fortress around the clearing house in the hope that the clearing house will then be impregnable from attack.

This is what the EU has sought to do with its Settlement Finality directive and the like in order to correct the deficiencies in its systems on the essential legal environment for clearing. The surrounding legal system must also be impregnable against attack. The fortress at the centre depends on the surrounding country and cannot be isolated from it. Financial dealings are intricately interconnected with the whole territory of a modern society, creating knock-on risks. English law, even outside the fortress of regulatory protections, is largely bulletproof on a number of legal constructs which are absolutely crucial to the safety of clearing houses and those remotely involved.

These include set-off and netting, security interests, trusts and contract predictability. This is not the case in almost all the EU legal systems. Outside the fortress, their regimes on these subjects are generally weak and unpredictable and virtually none of them have all the protections. Hence the gaps. My view is that the international financial community needs a full non-politicised legal risk analysis on this host question. No effective clearing system, no modern economy.

Philip Wood Shere, Surrey, UK

FT

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