Examination of witness
Mr Xavier Rolet KBE.
Q66 The Chairman: Good morning, Mr Xavier Rolet, chief executive of the London Stock Exchange Group. Welcome to our inquiry on Brexit and its impact on financial services. I have to go through some housekeeping points. You have a list of interests that have been declared by Committee members. This is a formal evidence-taking session of the Committee. The full transcript will be taken. This will be put on the public record in printed form and on the parliamentary website. You will be sent a copy of the transcript and you will be able to revise it in terms of any minor errors. The session is on the record. It is being webcast live and will subsequently be accessible via the parliamentary website. Would you like to make any introductory remarks?
Xavier Rolet: Thank you very much for giving me an opportunity to present some evidence. I will be very brief. Since the 2008 financial crisis the world’s regulatory environment has changed substantially with regard to past ways of carrying out financial activities that we at the London Stock Exchange believe should remain at the service of the real economy—that is actually what we do as an infrastructure company. New regulations here in the UK, in Europe, in the US and around the world have put renewed emphasis and even renewed importance on financial infrastructure in general, particularly services like clearing or settlement that enable banks and other financial market participants, including asset management companies, to optimise the balance sheets and—this is key—reduce systemic risk in the financial services industry. It is in that context that I will also provide evidence to you this morning.
The Chairman: Thank you. You do a vast range of different activities across different locations. Would you be able to go into slightly more granular detail about which aspects of your business will be affected by Brexit, and how?
Xavier Rolet: London Stock Exchange Group, in terms of its activities today, is characterised by three core product areas. The first is the provision of intellectual property. This is a quantitative set of products—for example, indices and benchmarks—that enable asset managers, corporate issuers and other economic players to monitor, control, hedge and benchmark their risks in financial markets. That accounts for slightly over 30% of our revenues.
The second important and possibly better-known aspect of our activities is what we call our capital formation activities, where providers and users of capital meet. Of course our equities business is very well known; it is very global. As a centre for primary issuance for both equity and debt, London Stock Exchange is one of the global leaders. There is also a range of other services in commodities and products from the trading of electricity to derivatives covering basically the complete gamut of listed derivatives, as well as cash products. Capital formation funds enterprise in the real economy. That represents about one-quarter of our revenues.
The third area of our revenues, which is about one-third of our revenues, is an area that in our jargon—I apologise; I appear before you today as a technician—we call “post-trade”. This is what I referred to earlier and is probably the most significantly impacted activity in the context of the outcome of the British referendum on the EU. It is an activity whereby we provide relief to our customers—corporate insurers, banks, broker-dealers, asset managers—with regard to their balance sheets, by collecting the exposure that they have to each other in areas ranging from securities to what we call notional products—over-the-counter derivatives that are not securities per se but contractual obligations that financial market participants contract to each other. By collecting that financial exposure by netting, or compression, we are able to reduce it very substantially—the numbers are very large; we are talking about hundreds of trillions of US dollars of underlying securities or notional exposure—across the world’s 17 largest currencies. That is our clearing business. It is underpinned by the activities of companies like LCH, which no doubt is well known to many people in the City. We operate other clearing houses around the world, particularly in the EU. This also involves settlement, depository and custodial activities. Here again the numbers are quite large and range within the trillions of euros, sterling or other securities, where we effectively act as a settlement agent and a custodian. These are the three core areas. There is a small area of activity in terms of revenues that none the less is important for the UK globally: our technology activities. We offer to a range of countries, exchanges and financial market participants around the world our know-how through the provision of dedicated technological expertise in trading, clearing and settlement. We have signed in excess of 50 global relationships.
I apologise for this slightly lengthy presentation of the Group, but it is helpful to put this in context. We are far more than UK equities, although that business is very dear to us. The Group today operates as physical offices in more than 26 countries. We market our products in 95 countries. Our revenues are equally balanced between North America—that makes up about 25% of our revenues, particularly the United States—the UK and the rest of Europe, which represent about approximately 25% of our revenues each, China, the emerging markets and a range of other revenue sources in areas like Central Asia, Africa and Latin America. We are a very diversified group internationally from a revenue standpoint
Q67 The Chairman: Thank you, that is very helpful. I wonder if you could elaborate a bit more on the third part that you spoke about, which you identified as being most affected by Brexit—your clearing, your technology, your netting compression activities and so on. Why is Brexit detrimental to your role in that regard?
Xavier Rolet: That is indeed the most potentially impacted area of activity. To put things in context, LSEG via its clearing operations—it is really clearing that we are talking about for the moment—over the past couple of years, through innovative services such as the compression service that I mentioned earlier, has developed unique global expertise across the 17 most important currencies in the world today—Asian, European, including sterling, and North American—and, through innovation, has seized a very large share of this global market. The core service and benefits that we offer to customers today—I will give you a few numbers that are a matter of public record—is by collecting the exposure that banks and asset managers have to each other in product areas such as interest rate swaps, credit default swaps and foreign exchange. For example, LCH is a global leader and a commercial success, which by the way is very important to financial services in the UK and to the real economy. Other services like repo transaction, particularly in the eurozone, we offer through that central clearing service, which handles short-dated as well as long-dated products—in some cases going all the way out to 50 years, so very long-term commitments in terms of financial obligations. That is a massive amount of risk reduction. I will give you some numbers to put this in context.
Last year, our interest rate swap engine, called SwapClear—these are public numbers; you might appreciate that I am also making comments in the context of being under the takeover code and UK panel rules, so I must stick to publicly disclosed information—cleared the equivalent in US dollars across 17 currencies of $555 trillion of interest rate swaps. Through its compression service, which is done across all these currencies, it compressed $328 trillion, which enabled LCH to eliminate $110 trillion net of risk. These clearing houses are of course regularly rated by central banks. So the financial economy saw a physical risk elimination of $110 trillion net worth of risk—or the equivalent across all these currencies. That saved our customer base. I must highlight here again that whatever impact there may be from Brexit or, frankly, any other regulatory decisions, we are always at the service of our customers. It is our customers who tell us how and where they want to move the business. Still, that saved our customers the equivalent of $25 billion of regulatory capital. This was a substantive competitive achievement for UK financial services, because our business is run globally.
On the potential impact, it is important to point out in the context of new regulation in the form of the mandate for clearing in asset classes like interest swaps, which has come out in the EU in the EMIR directive and in the US with the Dodd-Frank Act—there is now a mandate, a regulatory requirement, to clear the securities—that we at LCH were able to achieve that competitive excellence due to the benefit of global compression services. In our view it is also significant, while of course the framework around the Brexit negotiation remains unknown for the time being, that some, including at the highest level of the political apparatus of some states, have claimed clearing, pointing out the importance of that business. It is quite relevant that some outside the UK will have seen an immediate opportunity to claim that business for their own in the context of the projected separation of the UK from the EU. While clearing is not mandated in all asset classes, there are other providers. It is quite a competitive environment and there are certain financial services transactions that are in fact uncleared, so it is quite an open competitive layout. What has been achieved here in the UK is obviously the object of great interest to other nations that would be very keen, if they could, to see the migration of that business.
I would make one short comment in that respect. These numbers are of course very large; frankly, they exceed the consideration that is normally attached to financial services. These businesses are also systemically relevant, and the migration of such businesses, while technically possible, also entails a number of non-financial risks, particularly operational ones, of a systemic nature that must be taken into consideration by all policy stakeholders.
Q68 Lord Woolmer of Leeds: There has been some talk of a bespoke agreement coming out of discussions and negotiations. In your view, what features of a bespoke agreement would be most helpful to the interests of the UK financial sector and, of course, of your own group?
Xavier Rolet: Again, I speak as a technician in the clearing and infrastructure area, so I feel that I can comment specifically for that industry. It is clear today that a very important feature in our view must be secured if we want to convince our customers that it is safe to continue to clear and assign the clearing of these transactions to the UK for the long term, given the very short timeline linked to Article 50. When you are looking at booking a 10-year, 20-year, 30-year or even 50-year swap or credit product in a location that may be challenged from a compliance standpoint within a very short period, two and a half years, it is really important that two elements that are linked to each other—again as far as the clearing industry is concerned—be maintained. One is equivalency. The UK benefits from its current membership of the EU not only from equivalency and access to euro-denominated securities but from another important element that is sometimes overlooked: it also has access to the United States market. LCH today clears in the region of 90% of the domestic US dollar interest-rate swap market, benefiting from the equivalency and mutual recognition of clearing houses between the EU and the US. That element is obviously very important for continued equivalency, which leads then to the right to passport those activities—namely, to have access to EU-based as well as US-based asset management and banking organisations. Equivalency leads to effective clearing businesses.
Passporting is also very important to maintain—I want to be very specific about the way I phrase this—the predictability of an operational environment that reassures our clients that they can continue to do their business in the way that they have for the past few years with us right here in the UK, without the need for taking alternative measures—either asking us to offer alternatives to UK-based clearing houses or, potentially, giving the business away to competitors.
Lord Woolmer of Leeds: I think others will follow up the question of equivalence and passport. Are there any other features of a bespoke agreement that would be important for not only your own business but your various customers?
Xavier Rolet: Yes. That is the question that as an infrastructure company at the service of others—we are more like a motorway company or an airport, so others can basically use our services—we ask ourselves every day. One would be the ability for the world’s banks and broker-dealers, in addition to UK banks and institutions that operate in London or in the wider UK, to continue to service European-based customers, US-based and beyond, particularly in the case of the Brexit debate. The implementation of new European legislation—MiFID, the Markets in Financial Instruments Directive—creates a potential criminal liability for any broker or any other financial service’s participants who would cover EU-based customers and offer financial services to them—for example, brokerage services, but there are many others. We consider in everything that we do and represent publicly the importance for our customer base that today uses the UK, and London in particular, to access and service European-based customers and be able to maintain that access through continued passporting. That is very important. London, as your Lordships well know, is the number one global centre for international financial services as the biggest portfolio of global banks and broker-dealers bar none, leading the biggest financial centres in the United States and elsewhere in Europe and Asia. For our capital formation businesses, whether it is access to customers or the ability through our primary markets to raise debt and equity, for not only British companies but global insurers—London, for example, is the global offshore centre for the raising of green finance, green debt, Indian masala bonds and Chinese dim sum bonds—it is a really big international business. It is important that we can continue to distribute these products at the point of primary insurance from London to the customer base, and there is of course a substantial customer base in the European Union. On the trading side, we consider these issues and they are very important to us.
On the third area, which I have not mentioned so far, intellectual property—indices and benchmarks—today London Stock Exchange Group, through its acquisition of FTSE, Russell and other companies has achieved a leading global position. Assets under management on the benchmarks are in excess of $10 trillion or equivalent. It has coverage of a full range of markets; for example, LSEG operates the most liquid domestic Chinese index future contract, the so-called A50 contract. It operates the leading indices in Europe: the famous FTSE indices and the Russell family of indices, which are very important benchmarks in the US. It is important in the context of a distribution that these products continue to operate. Although they are not as regulated today as clearing houses or our trading activities are, there is clearly a very strong impulse coming out of the EU—from other jurisdictions too, but led by the EU—to seek to increasingly regulate these activities. Currently all these global indices are operated and managed out of the UK, with a local presence, but we also have to think about whether in the medium-term future we will be able to continue. We must think of the future and our ability to continue to offer these services. The group computes and calculates almost 1 million indices every day, underpinning, as I said, over $10 trillion of assets on the benchmarks globally. It is important also to protect the future in terms of maintaining access, from the UK or elsewhere, to our European client base.
Q69 Lord De Mauley: Several witnesses have said that, regardless of the stipulated two-year period, in reality the negotiation between Britain and the EU could take longer. Whether or not that is the case, what transitional arrangements, if any, would help to tackle volatility and mitigate risk in financial services and markets in the period until the terms are agreed?
Xavier Rolet: That is a key question. I should disclose that we are very supportive of the concept of securing transitional arrangements so that the necessary negotiations, which appear quite complex, can be carried out. The flip side is that it seems to us that Article 50 was designed with exactly the opposite set of objectives in mind—that is, to impose and enforce such a reduced timeline to raise the cost of exiting the EU and make it punitive, or to create a level of uncertainty. This is our number one concern. Given the decision that has been made, there is no doubt that ultimately Governments will sit down and negotiate agreements and it is not for us to opine on this; we shall just enforce whatever regulations are given to us. However, the primary cause of potential instability or migration of business would come from your Lordships’ earlier questions: if our customers are faced with an uncertain outcome within, say, the next two and a half years, for the protection of their own customers and shareholders they likely have to start today to think, plan and execute alternative arrangements. They might come to us and say, “We understand that there will be a deal but we don’t know what it will be, so offer us alternatives”. Our business is and can only be customer-driven; they are ultimately the ones who will make these decisions for us, whether on clearing, trading arrangements or financial services. Say there is a leasing capability attached to a car manufacturer exporting a substantial amount of the cars that are manufactured to the EU using a UK leasing-based company. If it is possible that in two years’ time that leasing company may no longer be authorised to offer those essential leasing services from the UK to its customers, it needs to start taking action today to apply for a licence to continue. Hence the real difficulty: for most financial securities and licences, the delays in securing a licence easily exceed a year; 18 to 24 months is the norm, particularly since in most cases the regulatory environment in Europe is less global, sophisticated and deep than it is in the UK. So the ability to process multiple applications takes time. This is the issue that financial services participants face in the UK: customer behaviour today is forced by the very short timeline that you referred to and the necessity to plan for the very worst outcome. In that context, any messaging of a political nature tends to shift behaviour a little more to one side or the other. That is the key. It is about ensuring that our customers will not be in a situation in the next two years where all of a sudden they have large amounts of risk or activities that are non-compliant. In that context, new regulations such as MiFID or Dodd-Frank in the US provide an environment that is new. Obviously it has been here for a few years, but it does not have the flexibility that financial services markets might have displayed 10 or 15 years ago when this sort of mutual access was far easier. It is far more regulated today and more complex to plan for that kind of change.
Lord De Mauley: Can I press you a bit? You have very helpfully hinted at what participants in the market might do, as it were, during the transitional phase. What could our Government do in their negotiations that might be helpful?
Xavier Rolet: Going back to Lord Woolmer’s earlier question, in any negotiations one wants to keep some elements of them close, but there are two elements. One is messaging that helps to reassure the client base in general that making an early move could be the wrong decision—that in the end there would be very significant costs, not just to UK participants but to those in the rest of the EU, of disagreeable, contested or difficult agreements leading to the risks of migration and dislocation. This is a very sensitive and sophisticated industry, as I think the past as shown, which at times, particularly when leverage is too much, is prone to accidents. It is in everyone’s interests to preserve the benefits of what London has achieved, including for the rest of the EU. Independent studies, not linked to the London Stock Exchange, have shown that the disaggregation of the euro component of our clearing engine—which, as I referred to earlier, covers 17 currencies in a single default fund here—would cost the financial services industry $77 billion of additional margin. That is a very substantial cost to the balance sheets of banks that remain quite highly leveraged. So there are advantages and benefits to both sides in having an agreement that ultimately ensures that financial flow and the real economy can continue to operate in an optimised environment. Any messages—from either side, by the way, not just from the UK Government, to answer your question, so also from the European side—that that overriding commercial and economic optimisation will be central to the agreement would help to reassure, investors customers and companies that ultimately things will end well and that commercial and economic arguments are likely to win the day. Of course, we cannot eliminate all that uncertainty.
Another element, which I think is a temporary one, is of course that the other side of the European negotiating table currently has Governments who are facing imminent elections and substantive outcomes. There is the very important referendum on 4 December in Italy, which the Renzi Government are prosecuting not just with a view to get governance improvements but to modernise, reform and improve the performance of the Italian economy, for the interest and benefit of everyone. There will be elections in the Netherlands, France and Germany. So obviously the other side of the negotiating table today is uncertain. In my personal opinion, the real negotiations are more likely to start when the Governments that have been newly elected and effectively have a number of years ahead of them, and perhaps will take an appeasing approach to the overall political applications of leaving the EU, take their place at the negotiating table. I believe that will facilitate a more commercial, economically minded negotiation. We are still in a period where there is a great deal of uncertainty as to who is going to be on the other side of the table, and the priorities today of some of these Governments may change. So from a negotiating standpoint, this is also something that hopefully—
The Chairman: Forgive me, Mr Rolet, we are well aware of the political context in Europe. We were wanting to know from you whether there is something specific that, from where you sit, you might wish the Government to take on board in their negotiations. If you do not have any specific issues and it is only about messaging and the context of the negotiations, I would like to move on and bring in Lord Skidelsky.
Q70 Lord Skidelsky: You mentioned Dodd-Frank. In that context, I think you said that the new regulatory environment has made the financial system less flexible, and of course that may also be true of the new European regulatory regime. The purpose of these regulations is to reduce risk and in particular to prevent the kind of correlated financial flows that led to the crash of 2008. Is your argument really “the less regulation, the less risk”? Is it that the financial services sector is the best judge of the risks that it runs, and that the success of the London financial services sector is due to the light-touch regulatory environment that it has enjoyed?
Xavier Rolet: Your question gives me an opportunity to clarify my earlier statement. That is not at all what was implied in my comment. I think the days of light-touch are long gone. The reason why these regulations were set up, as a result of political and regulatory decisions, was to move from a world where financial services participants would deal with each other and accumulate a lot of balance-sheet exposure without visibility, transparency or the netting and compression benefits that LCH has provided for. The point I was making was that the new regulations, Dodd-Frank and EMIR, codify—this has been for the better; the recent financial market instability has been handled very well by clearing houses—far more strictly than in the past access to the market. It is an access point. If you wish to offer services in the US or the EU, you have to be compliant with a stricter framework that has been extremely beneficial to resilience in financial services but also codifies access in a far stricter way than in the past. So my point was not about light-touch versus heavier-touch but about the fact that—this is my answer to your earlier question, Chairman—from a clearing standpoint and an infrastructure standpoint, we seek to maintain equivalency and maintain passporting as a key negotiating ask, together with the supportive messaging in terms of the relevance of economic issues.
Lord Skidelsky: But if the regulatory regimes diverge, will it be more difficult to maintain equivalence?
Xavier Rolet: Certainly. This fact is not necessarily advertised enough but currently there is mutual equivalency recognition between the US and the European regime, specifically in our business for clearing houses. Although the rules are not 100% identical they have been deemed by regulators to be equivalent, thus giving access to European London-based clearing houses to the US market, and vice versa.
Q71 Earl of Lindsay: I want to carry on from where you have just been—the absolute importance of retaining post-Brexit equivalence and passporting rights. We have had witnesses suggest that the way third-country equivalence works within the EU regime as it is designed and operated is not a wholly satisfactory process. There are uncertainties over how equivalence is judged and when and how it might be removed, and there is the potential for constraints on, shall we say, the UK regulatory regime’s innovating the regulatory arrangements so that it is always fit for purpose or perhaps innovating financial products. Do you share those concerns, or do you think it should be an absolute requirement that third-country equivalence as currently defined and operated should be the objective of the UK negotiation over Brexit?
Xavier Rolet: I can only offer an opinion, since London Stock Exchange Group has no regulatory powers whatever. These decisions and analyses are solely within the power of regulatory entities—the FCA, the central banks and the Bank of England, as well as their equivalents in the EU and the US. It is clear that an equivalence process is very complex because it requires the assessment, by prudential as well as conduct regulators, that two regulatory environments, even if they are not 100% identical, are roughly equivalent in the sense that they provide the same high-quality standards of conduct and prudential regulation, including the balance sheet as managed by the central banks. We, as a regulated entity, apply and enforce the rules that they give us. I would say as a personal opinion that on average—I am not speaking on behalf of London Stock Exchange Group because we have no opinion beyond enforcing what the regulators tell us are the rules—the equivalence process between mature markets, the EU, including the UK, and the US has worked well. Could more be done? Certainly, but this is something that parliaments as well as regulators are looking at.
I also think, and this is something we have said publicly, that with regard to wholesale businesses, these efficiencies and savings that clearing houses offer, in terms of a reduction in margins and the elimination of risk, are very important for banks and investment management institutions because relief on their balance sheet and the elimination of risk means that they can invest more in the real economy. They can either deleverage, in the case of companies that are too leveraged, or they can deploy their balance sheet more advantageously for the benefit of the real economy. Because business is so globalised—particularly for the blue-chips, which export and import—efficiencies, as I showed in the case of the SwapClear example, cannot be achieved as much, certainly in the context of the single currency or a single market, as if you put several currencies together. So we view the equivalence process—mutual recognition in some cases, and passporting—as very advantageous to economic growth. It is a process that in some cases, once the decision is made, sometimes requires several years of implementation. It is not a 100% perfect process but one that is certainly advantageous to the UK economy and its partners, and which fundamentally we support.
Q72 Earl of Lindsay: Some fears have been expressed to us that the EU third-country equivalence process is ultimately subject to political decision-making—that there may be a technical interpretation as part of an assessment, but actually the decision on equivalence is a political one. Those who have expressed concerns about the way this works in the EU have suggested that the global equivalence arrangements—the protocols and understandings—will ultimately become the most important drivers and dynamics. Would you agree with that assessment? If you do, to what extent should EU equivalence none the less remain a sought-after negotiating goal?
Xavier Rolet: I agree that global equivalence is effectively the Holy Grail, particularly in financial services regulation. The events of 2008 have shown that no country on its own—even the largest financial services market in the world today, the US—can handle on its own, within its own border, a systemic event, given the correlations and interrelations between the financial services industries, which generally reflect the way the global economy works. So yes, I support the assessment of those who ultimately believe in a global equivalence. Of course for markets that are like-minded you need to set a high bar of regulation, a high standard, rather than loosening up the standards to increase membership. Once those high standards are underpinned—for example, by regulation such as EMIR, MiFID or Dodd-Frank, including over time more countries to widen the benefits of the economy—and once you have set the right standards of systemic resilience and conduct authority or behaviour, then you put yourself in a good position to help the economy to grow a lot faster.
On the other part of your question, the EU’s own equivalency and the way it has been done—potentially the political overtones—we never look at a regulatory decision through a political filter. Again, we are technicians; we look at the impact on our customers’ activities and how we are going to comply with the decisions as quickly as possible. It would probably be unrealistic to expect that regulation of an industry as vital and publicly visible as financial services could be completely isolated from the political process anywhere, nor would this be desirable since the public have to have a big say. In our view, this happens pretty much everywhere around the world where sophisticated economies reach a size where the public, through their elected representatives, the Executive and other political stakeholders want to have a say, so we regard this as totally legitimate.
Q73 Lord Shutt of Greetland: I have a series of questions. The heading really is, “Is clearing to clear off?” You have said it would be difficult for euro-denominated clearing to move from the UK as it is deeply embedded in the City. Why is that, and is it really the case? In your introductory remarks you mentioned people circling around looking for this work. What are the technical complexities in determining how Brexit might affect the clearing system? Is it possible for financial centres such as Paris or Frankfurt to take over the City’s role in this work, or will it go to the USA? You may recall that we had a visitor a fortnight ago, Mr Simon Kirby, the Economic Secretary to the Treasury. He said, “There is a lot of noise about clearing”. He went on to say, “Is it the most important element? Probably not, but it is a significant consideration”. That suggests that it does not give you absolute confidence that it might be uppermost in minds at the Treasury.
You have also said that there are a minimum of 100,000 jobs at risk if clearing were to relocate. I am assuming that these are quite well-paid jobs, and it could be that the people doing those jobs are supporting other members of the community such as spouses and family, so we are talking about a minimum figure of 400,000 people. We are talking about one in 150 people in the UK being affected if that job has gone. How likely is that job to be lost? Do you have a schedule of these 100,000 jobs so that we can weigh up the importance of this? I am sorry that this has been lengthy, but that is the package of questions.
Xavier Rolet: I will try to answer every one of them in sequence. If I do not give you a full answer or miss a point, feel free to interject. Clearing is indeed embedded in the City. I like your headline, “Clearing to clear off”; that might become a headline in the UK press but I hope not. It is clear that the fundamental appeal and relevance of what has been accomplished, particularly by LCH, are those embedded efficiencies of having a global business that includes a very important component of euro-denominated securities. Last year LCH as a group cleared in excess of €320 trillion in securities across repos, credit default swaps, foreign exchange and so on. The fact that it is embedded with other currencies and yields these enormous, substantial commercial benefits to the industry is obviously an argument against undoing this or, if it were to come undone—and it could; there is a risk, owing to the potentially changing regulatory framework—that could have a significant economic impact on our customers, banks and asset managers that post margin. As I mentioned earlier, that independent study by the Clarus Financial Technology group estimated an extra $77 billion of margin would be required if the euro component of a clearing engine were separated by fragmentation. That would reduce the compression benefit. That would be the immediate cost to industry in general and financial services participants and banks in terms of a higher regulatory capital haircut. So owing to the innovation of the last few years, the compression service and the global nature of that business, it is indeed economically embedded in the City and an advantage and an economic success that the City and the UK can be proud of. After all, it is something that has been achieved in the face of substantial global competition, not just in Europe but in the US and elsewhere. It is an economic benefit that is worth protecting and worth considering the impact of if it were to leave our shores because, frankly, it would be very unlikely ever to come back.
The technical complexities— again, I speak as a technician—are real. These are not businesses that are set up without a deep set of regulatory discussions, including with central banks. We are of course regulated by the Bank of England and the FCA but we also operate clearing entities in Europe regulated by various central banks. We are regulated in the US by the SEC, the CFTC and directly by the Fed. All these discussions are underpinned by lengthy multiyear discussions.
The Chairman: So if Paris or Frankfurt were rivals for this business, how long in your estimation would it take for them to reach the level of business activity that the UK has at the moment?
Xavier Rolet: I have said publicly that while there was keen interest in other European capitals to try to seize that business—particularly in France, as we have heard from political pronouncements—we also look at New York. Our customers are telling us that New York today is also a key potential competitor, given the global nature of financial services business carried out in Europe. They are clearly areas of expertise and efficiencies—
The Chairman: What are the timelines?
Xavier Rolet: The timeline depends on the regulatory discussions and again, because this boils down to the customer, customer desire to potentially hedge a negative outcome. We have never spoken about timelines. We have expressed risk in terms of hundreds and we stick by that estimate. We expect that in due course that there will be further technical information that will be available and will be provided to this Committee, but we do not have a timeline. It depends on the customer.
The Chairman: So you are expecting the impact to be quite drawn out over time?
Xavier Rolet: Again, we cannot be certain. It can depend, for example, on declarations made, including in the UK, as to whether this business is viewed as valuable or not. That impacts customer behaviour. Of course we do not control these affirmations of interest or lack thereof in this business. But we stand by our estimate of 100,000 jobs, which was carried out with the numbers that are available to us. To put it in a broader context, whereas there are so many industries and areas of economic activity that are potentially impacted by Brexit, whichever way one seeks to determine that they will be, the fact that clearing was raised immediately by some as an area that they saw as vital to repatriate or migrate out of the UK shows the importance of that business. It is not by chance that the subject of clearing came up so quickly, within a few days of the outcome of the referendum.
Lord Shutt of Greetland: But can you assemble these 100,000-plus figures? It is easy to say that there are 100,000, but where are they all? Can you say that there are 1,000 there, 3,000 there and so on? We really need to know what this amounts to.
Xavier Rolet: We will provide a more detailed estimate. I can give you an insight. We are doing work with external auditors and parties whose job it is to go through this line by line. We have obviously done the calculation.
The Chairman: When are you expecting more details?
Xavier Rolet: Reasonably shortly.
The Chairman: Would you be able to provide them to the Committee?
Xavier Rolet: We certainly will. If I may briefly respond to Lord Shutt’s question, when you think of clearing there are of course the individuals involved in clearing. Among the client base are banks, asset managers and corporate insurers who have to post collateral. They have to compute their risk so you have the risk management entity, you have the Treasury function, and the risk management functions that then post collateral. You have all of the trading syndication. You have middle office and back office and a range of, as you pointed out, non-financial services that support these financial services. If I can put this in a broad context, just to give an example about how this could play geographically, there are 2.2 million financial services jobs in the UK today. Only about a third are based in the Greater London area. For clearing, we will provide more information in due course, but you are likely to see the same sort of geographical distribution.
The Chairman: We are slightly tight on time.
Q74 Lord Skidelsky: This is related to the 100,000 jobs. The headline: “The boss of the London Stock Exchange says Brexit could cost the UK a £440 billion per day business”. Presumably that is the maximum—the extreme. It will not be as much as that, will it? Some of the business will be retained. Is that not rather an alarmist figure?
Xavier Rolet: I do not think so and I think all the statements that we have made, particularly -given the takeover panel, have been carefully calibrated. I have not specifically said £440 billion, because that is a notional amount. But on the basis of what we have done last year on clearing, if the clearing business were to leave—and I highlight that point—we cannot separate the euro-denominated component from the other currencies. If through regulation and lack of access to the eurozone we lose the capacity to clear the euro business in London, the whole engine has to move because otherwise we lose the compression benefit, hence the potential appeal of a financial centre like New York. I believe that the £440 billion was inferred by a journalist in terms of the £555 trillion annual cleared in interest rate swap reduced to a daily notional. That is how they got the numbers. That is how it was based, but I have not personally said £440 billion. However, it is based on notional consideration cleared. If you take the £555 trillion annually divided by 250, and you add repos and you add forex, you get to these numbers and levels. These are not alarmist statements. They are based on last year’s statistics, and on the hypothetical assumption that—were we to lose or were our customers to tell us that they cannot wait for the outcome of the decision and they need alternatives, they need to clear outside of the UK—that whole engine is at risk. It is at risk not just for euros but dollars—Canadian, Singapore, Hong Kong—and Japanese Yen et cetera. These are real numbers. They are not calibrated to create either a conservative approach or an alarmist approach. They are based on last year’s activity—on 2015 numbers.
Lord Woolmer of Leeds: I think you said that there might be a move of clearing to New York rather than staying in London. What would be the advantage of that? When some European member states talk of euro clearing in the eurozone rather than just Europe, would that imply that all the rest of the clearing activities that you do, for example in London, are at risk of moving to New York? How many other countries in the world seek to ensure that any clearing involving their currency can take place only in their country? What other countries in the world have such a policy?
Xavier Rolet: That last point is very important. To go back to the question the Chairman asked me earlier about what we would ask of the UK Government, we would say that it is possible, today, to clear euro-denominated securities in the United States, so why should the UK settle for less than is available to the US? Actually, if you look at the reality—and that point is very important—while of course every nation in the world wishes as much clearing to happen within its shores for its national currency, the reality is that euros, dollars and sterling are cleared in a whole range of jurisdictions. This notion that euro-denominated securities could be cleared only inside the eurozone is not consistent with current practice as agreed by the European authorities, not just as it concerns the UK but as it concerns US and other Asian jurisdictions that are benefiting from mutual recognition. I mentioned Japan, for example, not that there is much activity. For us it is important that that framework objective, economically sustainable today, be recognised. On the other part of your question about clearing, I apologise for labouring the point but it is important to understand that the economic benefits afforded to clients of the London Clearing House, particularly on swap, forex, CDS and other over-the-counter derivatives, come from compression of cost securities. Again, if we start fragmenting and putting the US back in the US and the euro back in the eurozone, those benefits disappear. Customers would lose—banks, corporate insurers and asset management companies. That is why I always said that it is not our desire or our customers’ desire, but were we to be put in a situation where we have no choice owing to decisions made at a political and regulatory level, and our customers—it is all driven by customers—were to tell us to move otherwise they would do business elsewhere, we would certainly move. Financial centres in Europe have their own expertise, but let us not forget the power of New York as well to offer a global framework for business.
Lord Woolmer of Leeds: So if the European Union sought to ensure that euro clearing was done only within the European Union that would also have to apply to New York?
Xavier Rolet: Absolutely, and to other countries.
Lord Woolmer of Leeds: They would also have to prevent euro clearing in New York.
Xavier Rolet: Correct. They would seek either to prevent or to limit it, which is why I understand some discussions have already originated in the EU for limiting the ability of US-based clearing houses to clear euros in denominated securities—so capping or somehow restricting their ability to engage meaningfully in that business. That would not be consistent with the existing agreement around equivalency in mutual recognition.
The Chairman: As a final point, would there be value in the UK leveraging with the US to have a better negotiating position?
Xavier Rolet: I certainly would not want to comment on what the negotiating position of the UK authorities should be.
The Chairman: We have been trying to get you to do that all morning.
Xavier Rolet: I am a technical and commercial operator.
The Chairman: But you would wish us to have the same treatment at the moment that is accorded to Wall Street?
Xavier Rolet: To answer your question, it certainly would not seem judicious or advantageous for the UK authorities to settle for less than what the US and other countries in Asia have already achieved, which seems reasonable.
The Chairman: Thank you. That concludes today’s first public evidence session.
