Brexit Puts Financial Clearing Work Up for Grabs: QuickTake Q&A

Barely a day had passed after Britain’s June 2016 vote to leave the European Union when officials began to lay claim to a lucrative part of London’s financial industry. The location of clearinghouses for derivatives trades emerged as one of the first flash points in the divorce talks between the U.K. and the EU. French and German politicians say the back-office function could be stripped from London, with Paris or Frankfurt being mentioned as possible new homes. The European Commission has proposed a new system that could force big clearinghouses to relocate, while the European Central Bank has taken its biggest step yet to have more power over the industry.

Traders in stocks, bonds, commodities and derivatives rely on clearing to complete their transactions safely. Clearinghouses such as those that call London home act as intermediaries between buyer and seller, requiring traders to post collateral -- cash or bonds -- as protection against potential defaults. After the 2008 financial crisis, regulators around the world pushed for more derivatives trading to go through clearinghouses to reduce the risk of a default spreading across the system. Clearing firms collect fees on transactions.