The key aspect in this move relates to the practice of netting separate trades (via a process called ‘compression), which has become popular in order to reducing execution costs, and the amount of capital that needs to be posted with the clearing house. The critical point in this is that netting cannot be conducted across clearing houses, and per se such a fragmentation of the swaps market would inevitably impair liquidity. Those with a longer memory may recall that when the predecessor of Eurex, the DTB, initially set up its Bund future, it was suggested by many in London that the lion’s share of the volume in Bund futures trade would remain in the LIFFE Bund contract in London. However that proved to be rather foolhardy bravado, precisely because all the large German banks were shareholders in the DTB. The risk is that a similarly binary type outcome might happen with EUR swaps trading and clearing, which would have rather more profound implications for London’s position as a major financial centre.


However, a narrow focus on Brexit’s impact on the financial sector would be wholly misplaced. I obviously cannot hope to cover all the ‘bases’ in this short article, but there are two areas which seem to be much under discussed, firstly Japan’s business interests in the UK, above all in the auto sector, and the second is agriculture. In respect of Japan, there is an important point to bear in mind in cultural terms, namely that ‘loss of face’, or rather the potential for it, is always a key consideration in terms of reaction function. It should have come as no surprise that the Japanese government was far ahead of any other country or other entity, in terms of comprehensively detailing all the areas, about which it required clarification in terms of how Brexit might impact domestic (UK) business operating parameters, and trade with the EU and the rest of the world. The critical aspect is that while some elements of their businesses in the UK may have been maintained as going concerns for many years, even if profitability is or has been poor, the Brexit process allows for a comprehensive review of operations, and the closure of certain parts of those businesses without any loss of face. In specific reference to the auto sector, the key demand not only of Japanese automakers such as Nissan and Honda, but also the likes of BMW and Aston Martin, is that any trade agreement ensures that there is a replacement for the vehicle certification program (covering cars and parts), which would no longer be recognized by the EU, and to ensure that vehicles and components can enter and leave the country with minimal trade barriers, once EU ties end. In testimony to parliament, Honda’s UK CEO made it clear that the 10% export tariff that would be imposed under WTO rules, if there were no agreement, was not affordable.


10 | ADMISI - The Ghost In The Machine | November/December 2017


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