As we reach the crunch point in the EU/ UK future trading negotiations, it’s a reminder that there will be big changes next year in all markets, and that includes metals.
Maybe there will ultimately be a deal, but contrary to the promises of Vote Leave’s co-convener Michael Gove at the time of the Brexit referendum, the UK does not hold all of the cards. Nowhere is this more evident than in financial services, where the EU holds a number of Aces.
Reports this week indicate that the EU is prepared to grant its banks an 18 months extension to continue using UK clearing houses. This is not happening because the experts of the EU have suddenly been persuaded by Mr Gove’s rhetoric, but because they are concerned about financial stability should trades no longer be cleared in London.
London has developed significant expertise in clearing over the years, and trillions of pounds/ dollars/ euros in derivatives — including metals — are traded in the City each year. Moving that business overnight and at short notice would be very disruptive.
That said, the EU has long since been looking to entice euro clearing to the Eurozone and its leaked plans indicate that, in granting an 18-month extension, it is hoping to buy time for its financial centres to develop their own large-scale clearing business.
LME Clear is one of London’s key clearing houses, and while the extension will be a welcome relief, there will be changes too. For example, some members are setting up offices in the Eurozone to service customers there, aiming to create back-to-back contracts with their London entities.
If that sounds expensive and cumbersome, it’s clearly another cost of Brexit that wasn’t written on the side of the Vote Leave campaign bus.
The clearing fix might work for now, but cannot alter the changed dynamics, both economic, in terms of added costs, but also political.
The LME was built in part through the participation of European-owned companies, all proud to be LME members.
Metals hedging and trading will still need to be done and members will devise ingenious ways to do it. But the LME, which has often struggled to make its voice heard in Europe (and for that matter London) above the competing needs of other markets, will need to work hard to maintain links with its European customers and their regulators.
-
To request access to our commodities price predictions, please click here.
Originally published at https://chai-uk.com on September 16, 2020.
