What Will London’s Place Be in the Future of Global Clearing?

Investors would argue that New York, home to the two largest stock exchanges in the world, is clearly the nerve center of the global economy.

Others might point to Hong Kong as the engine of international commerce thanks to its deep ties with the world’s largest economies and critical role as the preeminent East-West trade mediator.

But from the perspective of clearing, one city plays an indispensable role in the way money moves: London.

The story of how London emerged as the world’s clearing hub has a lot to do with the U.K.’s changing global position in the post-colonial era.

The economist Ronen Palen has argued that “the City of London developed at the heart of the British Empire, somewhat divorced from the U.K.’s mainland economic needs, to finance trading and manufacturing throughout the formal and informal British Empire.”

In Palen’s view, despite being nationalized in 1948, the Bank of England continued to operate under the control of the City’s commercial banks. As such, in the years following the Second World War, the U.K. pursued monetary and economic policies that favored international banking, even if they were at the expense of domestic industry.

In fact, the country’s transition from a manufacturing-based economy to a services-based one throughout the 20th century was largely the result of an overvalued pound and consistently high interest rates.

Starting in 1979 with the removal of controls on foreign exchange, the U.K. underwent a period of intense deregulation of its financial services sector. Some of the biggest winners of deregulation in the 1980s were the City of London’s clearing agencies.

Thanks to a favorable regulatory environment and the presence of the world’s largest banks, today LCH group (originally London Clearing House) has risen to a position of global dominance. For example, in the market for foreign exchange clearing services, in 2021, LCH SwapClear accounted for 96% of all U.S. dollar swaps, and a 92.8% share of all euro swaps (Clarius).

Related: Investment Banks Want Better Standards For Clearing Houses

Brexit and the City

But not everyone is pleased with London’s entrenched position in global clearing networks. Even before Brexit, central banks in the eurozone were calling for the euro’s critical clearing infrastructure to be brought in-house. These calls have only grown louder since the U.K. exited the European Union, meaning that the EU has less oversight of London’s financial institutions than it did previously.

More on this: IMF Sounds Alarm Over UK’s Decision to Toss EU Financial Rules

Although LCH still takes the lion’s share of euro-based derivatives clearing, Germany’s Eurex is steadily gaining ground, and EU authorities have made no secret of their intention to support the bloc’s clearing agencies in their efforts to move the emphasis away from London.

It’s right into the middle of this geopolitical posturing that London’s latest clearing bank has entered. Launched in 2021, The Bank of London (TBOL) is marketing itself as a modern clearing bank with a vision of shaking up the way the world’s money moves.

Read the report: The Making of a Modern Clearing Bank

Today, TBOL is banking on being able to leverage cloud-based core banking technology and a platform-style “as-a-service” delivery model to establish itself as the next big thing in global clearing. And as of November when it launched, the firm was one of only six banks with a clearing bank license in the United Kingdom.

Find out more: The Bank of London to Integrate SAP Fioneer’s Cloud for Banking Platform

Business Clearing: Catching Up With Consumer Payments

At the consumer level, the world’s payments technology ecosystem is thriving. It has never been easier, cheaper or faster to make domestic and cross-border payments thanks to a generation of FinTechs that have pioneered real-time payment solutions by bypassing legacy banking systems and the more cumbersome payment rails.

Read on: Corporates, Consumers Give Real-Time Payments Fresh Look With $1 Million Transaction Limit

But at a larger scale, the newfound nimbleness of consumer-level payment products is a far cry from the still-heavy architecture of enterprise-tier transactions. There doesn’t seem to be a Wise or Remitly for businesses helping to move millions or billions between accounts.

Related: Banks Leap From Legacy Core Systems to Innovation, Real-Time Capability

Just as London is home to many of the paradigm-shifting FinTechs that have revolutionized how people around the world transfer money across borders, TBOL signals the city’s continuing importance in global payment networks and the international financial system.

At the end of the day, financial centers rise and fall. But for now, London remains a crucial lynchpin in the global clearing network, and what will happen next is anyone’s guess.

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