The shifting tides of finance: Deutsche Bank's move out of London
In the post-Brexit era, the economic and financial future of the European continent has been shrouded in uncertainty. As a consequence, Deutsche Bank has consolidated former London-based operations in Frankfurt. The €450 million in lost business capital is symptomatic of the growing trends that threaten to derail the UK’s dominant position in European finance.
What business has been moved?
Deutsche Bank intends to turn its London-based operations into a ‘ring-fenced’ subsidiary, as reported by a source to Business Insider. The term ‘ring-fenced’ refers to an operational model wherein a portion of assets and profits are financially separated for a variety of reasons, such as regulatory. The most recent iteration as part of this shift has been towards its Euro-Clearing operations for derivatives.
What is Euro-Clearing?
Clearing is a requirement regarding the issuing and sale of derivatives, which are simply financial contracts with the intention of minimizing risk in commodities. When derivatives are sold, a clearing house acts as an intermediary between the buyer and seller and insures that the necessary financial payments (most commonly the interest on derivatives) are made. By covering either party in the case that the other defaults, clearing houses are vital backdrops for financial markets, and prevent a single default from spreading through the entire financial system.
What is the impact on a global scale?
Currently, LCH, a subsidiary of the London Stock Exchange handles over 95% of the European based clearing, ensuring interest payments valued at $639tn, $143tn of which are for Euro-based derivatives. Deutsche Bank has opted to process the short-dated derivatives through the Frankfurt based clearing house, Eurex. While this does not require any physical change, and jobs in the UK will remain untouched for now, this could change in the not-too-distant future. Frankfurt, host to plethora of financial businesses, is just one of many prime European cities attempting to poach London’s business. While half of British Clearing is still done for US dollars, Paris, Luxembourg, Amsterdam, and many others are implementing legislation and making the necessary changes to inherit London’s role in the global clearing industry.
It is evident that many similar instances are to follow as the world adjusts to the changing power dynamics sparked by Brexit. Business always pursues an environment where conditions are most favoring, and it remains to be seen if a post-Brexit UK will be able to deliver. It seems Deutsche Bank is not taking any chances.