Dollar clearing systems question

Can someone help me out here? I’m getting a tad confused.

Hollande tells us that euro clearing will have to move inside the eurozone. Well, OK, shrug.

What I’m not quite getting is the dollar clearing system. I can see that there’s London dollar clearing, Hong Kong dollar clearing and so on. But then I get the impression that that’s not really, really, dollar clearing outside the US. Everything still goes through the US system at some point (normally New York) which is how those banks were busted for breaching sanctions.

The impression I get is that this local dollar clearing is more like being agents for New York than it is a full and total clearing system. Is that right? Or perhaps local agglomeration and netting of transactions which then the balance clears through New York?

The question becomes, of course, what actually happens if the euro must be cleared in the eurozone. Do we end up as with the dollar? Local, London, clearing which is then backstopped by shunting a few electrons off to Calais?

14 comments on “Dollar clearing systems question

  1. Iirc, you can “clear” anywhere where you have a surplus and an shortage to be traded. So your “local agglomeration and netting” is how it works.

    Ultimate dollar clearing (again, iirc) can happen at any of the Federal Reserve Banks. New York is just the most used one.

  2. Between national central banks the euro states don’t have an system of ultimate settlement in the conventional sense of swapping assets, they have a huge “contra” account called Target2.

  3. Hollande (now at 12% approval) is simply passing water into the wind.

    The Eurodollar originated in Paris more than 40 years ago where the Soviet-owned bank Banque Commerciale pour l’Europe du Nord (Cable address Eurobank, hence eurodollar) wanted to keep its US$ deposits beyond the reach of potential US sanctions. The effectiveness of the strategy was never tested but had it been, then third countries like the UK would have been drawn into the dispute.

    It’s all grown like topsy since I was a callow depot trader of sorts with East European banks in the West but any restrictions imposed by Hollande (or Draghi) will limit the functionality of the Eurozone. The worrying thing is that these folk, Juncker foremost among them, are prepared to suffer greater harm themselves in the interests of harming the UK.

  4. TMB

    Druncker has some influence in these matters, but the heads of government have more, particularly Merkel. In pretty short order, national economic interests will largely trump the vindictive anger of the EU fanatics.

  5. Btw, can anyone here tell me what the value of euro-denominated trading is to the City? Would its loss be significant?

  6. Simple principle is that anyone can set up a clearing house anywhere in any currency, but it is probably not going to make much sense unless you have a lot of financial institutions that are going to participate in your venture, and that means that you need to be an institution of substance (for participants to maintain an account) and there has to be a sufficient volume of business to make it worthwhile. As a result many clearing systems are based in the local central bank, but some are owned by their members, while in Hong Kong US% clearing is run by HSBC, Euro clearing is run by Standard Chartered and HK$ clearing is run by the Hong Kong Monetary Authority.

    The answer about the US sanction breaches is that it didn’t have to be that way, but the Iranians involved happened to have accounts with banks and wanted to make payments to customers of banks who chose to settle through the US systems. The banks hid customer details, dealt through NY and got caught. If they had been able to settle in Hong Kong there would have been no US issue.

    With regard to Hollande, he has a point in so far as it looks a bit silly if an Italian importer of German cars pays BMW and Mercedes via a clearing house system outside the eurozone, but there is nothing that Hollande and Merkel can do to stop the London branches of Chinese and South American banks settling their euro payments in a London clearing house if someone wants to provide that service.

  7. Theo: Yes, Very Superior, Old, Pale Juncker can’t resist making mischief but his ability to do so is constrained and he is under sustained bombardment at the moment.

    His latest moves to make accommodating noises towards the SNP, has provoked an angry reaction from Spain’s Rajoy and a rebuff from France’s Hollande. This follows on from his CETA blunder on Tuesday evening and a number of countries thinking Juncker (or the choice of Juncker as Commission president) at least partially to blame for Brexit.

    On the other hand, the heads of government aren’t responding to ECB forecasts of slower growth in the wake of Brexit by showing any signs of compromise on their Single Market freedoms (goods, services, capital, people). Perhaps that will come. Germany’s Peter Altmaier could be the man to watch.

  8. I’d far rather compromise on freedom of movement to get freedom of services – it’s the disastrous versus the unpalatable for me.

    I think the two big risks are:

    1) We place unnecessary stress on restricting freedom of movement and end up getting a bad deal for Financial Services and the City.
    2) The EU decides to try and punish us pour decourager les autres, giving us a deal that hurts us both.

    Paradoxically a worse reaction before Article 50 makes these less likely. if a big bank announces plans to leave and the Eurozone seems contaminated by Brexit, we’re more likely to get a reasonably stabilising deal.

  9. TMB,

    “The worrying thing is that these folk, Juncker foremost among them, are prepared to suffer greater harm themselves in the interests of harming the UK.”

    They won’t suffer, they’ll have their shiney chauffeur driven cars and gold plated pensions no matter what happens, it’s the people of the EU who will suffer.

    It’s good to see him getting slapped down, but he’s in a powerful position and let’s not forget he was appointed against our Government’s advice, so not much sympathy around these parts.

  10. BiND They won’t suffer…it’s the people of the EU who will suffer.

    You’re quite right and that’s what I had intended – clumsy of me. Thanks

  11. Seems likely that there will be a major row between the Council, Commission and EU Parliament before we get around to the 50 notification. Farage should probably continue to wind Druncker up at every available opportunity to see if he can be provoked into starting it.

    And out of general principles.

  12. Hollande is talking out of his arse. There was a case on this in the ECJ last year.

    ECB, backed by France, tried to initiate move to force all Euro-denominated clearing among EU-based FIs inside the Eurozone. The ECJ told them to fuck off on two bases:

    1) the ECB is a central bank, not a banking regulator or a payments systems regulator. Its competence is restricted by its charter to central banking activity (that is, monetary policy).

    2) it’s manifestly against Single Market rules to set geographic restrictions on business activities. You’re supposed to be able to do any business with anyone in the SM from anywhere in the SM. That’s what a single market is.

    Two ways this could change:

    1) ECB is out of this fight (as the ECJ told them this was none of their fucking business), but it could potentially seek to expand its powers by seeking variation of its charter. This would require initiative by the Commission and ratification by the Parliament. Even then, the new charter could be open for challenge in the ECJ.

    2) Britain could leave the Single Market, which won’t happen.

    So yeah, Hollande is talking out of his arse.

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