IMF sees negligible rise in costs from moving London clearing after Brexit

BRUSSELS: The International Monetary Fund said on Tuesday that it foresaw only a modest increase in transaction costs if clearing and other financial activities are moved from the City of London to the European Union after Brexit.

The forecast, published in the Fund's annual report on the euro zone, contrasts with British claims that splitting European securities markets would increase costs and damage EU economies.

Clearing of euro-denominated securities is dominated by London, but it could be relocated to the EU when Britain leaves the bloc.

"Brexit is likely to transform the financial landscape, with some market activity migrating to EU-27," the IMF said in its report.

It said clearing and "securities transactions" could be moved from London, causing higher transaction costs during the transition. But "the impact is likely to be modest", it said.

Britain's financial lobbies have long argued that relocation, which would undermine London's position as Europe's top financial centre, will significantly raise costs for euro-denominated transactions, affecting the euro and the EU economy.

In plans published in June the European Commission said relocation would be a last resort and would only concern central counterparties deemed as systemic by EU watchdogs.

Eurex, Germany's stock exchange, criticised the EU proposals on Tuesday for being too soft.

Clearing involves a third party standing between two sides of a trade to ensure its smooth and safe completion. Derivatives are the most traded securities.

Most euro-denominated clearing of derivatives is performed by LCH, a unit of the London Stock Exchange and the largest clearer of interest rate swaps.

The IMF said that although it was too early to evaluate the impact of the two-year Brexit talks that formally started in March, financial institutions were likely to make decisions "well ahead of the actual separation".

Several global banks have said they could move thousands of jobs out of Britain to prepare for Brexit.

The IMF encouraged the EU to strengthen its financial supervision and regulation to handle the greater volume of financial transactions that may occur in the continent after Britain leaves the EU.