It was billed as the first big Brexit battle for the City of London. Would Brussels launch a raid on London’s lucrative business of clearing €1tn (£880bn) a day of euro-denominated trades, which is what former French president François Hollande wanted when he said “those who seek the end of Europe” needed to be taught “a lesson”? Or would the European commission take the grown-up view that, actually, forcing all this financial activity to take place within the borders of the EU would do more harm than good, even for the EU itself?
The answer – as with most things Brexit-related – is messy. The keenly awaited report from the commission booted the important decisions into the long grass of technical assessments. Yet the commission has also retained the nuclear option of enforced relocation for clearing houses, bodies that stand between two parties to a financial trade, when they’re dealing in euro-denominated derivatives.
That will alarm London, and especially the Treasury. Not even the US, where protectionist tendencies are rarely far from the surface, insists upon dollar-related derivative trades being cleared in its own back yard.
On a cheerful reading for the City, one might say that nothing has been settled immediately. London has avoided an upright Hollande-style land grab. The commission is formally open to the idea that enhanced supervision by the European Securities and Markets Authority could do the job of ensuring the EU can protect itself against market instability.
Yet the proposal also clears the way for that same body to insist that clearing houses move their euro business to the EU in some circumstances. The idea almost seems to be framed with London in mind. The proposed two-tier system actually contains three tiers, with the highest category of “substantially systemically important” seemingly reserved for LCH, the London Stock Exchange’s big clearing house in London. LCH currently clears about three-quarters of interest rate swaps denominated in euros.
A judgment that LCH is big and important is not contentious. But the idea that safety would be improved by peeling off parts of the business, and forcing them into the EU, makes no sense. Such a manoeuvre would probably create more risks, not fewer. Smaller pools of capital are less able to absorb shocks when one party to a trade defaults. Regulators have to work harder to police activity. Costs would increase for everybody, including businesses across Europe.
The correct way forward here would be for the EU to give itself whatever powers of supervision it wants over euro-denominated clearing. It’s not hard to do, and it’s how the US operates. The entire thrust of international regulation since the financial crisis has been to improve transparency and LCH already dances to the tune of many different regulators. Clearing houses, or central counter parties, are now one the most tightly regulated parts of the financial system.
But none of those international regulators has ever insisted on enforced relocation of clearing. Brexit, by rights, should not change that approach. Brussels, one fears, is playing hardball games even before negotiations have even started.
Recovering Capita
If your share price has fallen as far and as fast as Capita’s, the definition of success is avoiding fresh calamities. Tuesday’s trading update did the trick. The outsourcing firm continues to expect profits to improve in the second half. Its win rate on contracts has returned to one-in-two, as opposed to last year’s one-in-three. And the promised cost savings are arriving. The shares rose 15% to 634p.
That’s a long way from the £10.50 of a year ago, before the first of two hefty profits warnings related to overspending on the London congestion charge contract and failure to spot the rot in the now-sold recruitment business. But it should encourage the idea that Capita requires less surgery than sprawling rival Serco did.
The risk of a rights issue could soon be zero. Net debt was £1.8bn at the last count but, if the sales of the asset services division fetches the rumoured £700m, the proceeds would return Capita’s balance sheet to the land of the normal. At the point, the ambition to protect the dividend, currently offering a 5% yield, would be more than credible. The divi costs £200m a year, and Capita still managed to generate £400m of cash in its rotten 2016.
Chief executive Andy Parker was obliged to fall on his sword in March. It wasn’t unexpected since Capita has had two profits warnings in 25 years and both were on his watch. But, as matters look today, he’s not handing over a basket-case.
