>>> Parmalat offer by Lactalis ruled unfair to minority shareholders by advisor

Parmalat offer by Lactalis ruled unfair to minority shareholders by advisor (translated)
26 FEB 2017
Intermonte, the advisor commissioned by activist investor Amber and minority shareholders association Azione Parmalat, has ruled in its fairness option that Lactalis’ bid for Parmalat [BIT:PLT] undervalues the company, Italian language daily Il Messaggero reported.
The article cited a statement by Intermonte noting the EUR 2.8 per share being offered by Lactalis is unfair, and estimated Parmalat's shares to be worth between EUR 3.02 and EUR 3.52 a share based on market multiples and EUR 2.9 and EUR 3.58 a share based on actual cash flows.
In December, privately owned Lactalis announced it would launch a voluntary tender offer for all outstanding ordinary shares of Parmalat at EUR 2.80 per share, or EUR 636.7m in total.

FT : Dealmaker Michael Klein helped kill Kraft Heinz bid for Unilever

Dealmaker Michael Klein helped kill Kraft Heinz bid for Unilever
Financier called Warren Buffett to explain political hurdles

Warren Buffett was persuaded to drop Kraft Heinz’s $143bn takeover approach for Unilever by the corporate financier Michael Klein, making the dealmaker the unlikely executioner of what would have been the second-largest merger in corporate history.

Earlier this month, Kraft Heinz, which is backed by Mr Buffett and Brazil’s 3G, revealed that it was seeking to acquire the Anglo-Dutch company behind brands such as Dove soap and Ben & Jerry’s ice cream.

Two days after the proposal became public on Friday February 17, Mr Buffett, the billionaire head of Berkshire Hathaway, awoke to a letter from Paul Polman, Unilever chief executive, explaining his hostility to the deal.

Mr Klein, a former Citigroup executive who has worked alongside Tony Blair, former British prime minister, on some deals, then telephoned Mr Buffett to explain political sensitivities around the deal, according to people briefed on the discussion.

In the UK, Theresa May’s Conservative government has been pushing for stronger industrial policy that safeguarded jobs, and MPs had already voiced opposition to the deal. In the Netherlands, home of half of Unilever, parliamentary elections are scheduled for March 15.

The Big Read
The $143bn flop: How Warren Buffett and 3G lost Unilever
The story behind the failure of Kraft Heinz to win over the Anglo-Dutch giant
Mr Klein then put Mr Buffett on the line with Mr Polman. Within hours, Kraft Heinz had pulled its bid.

Mr Klein is better known as a consummate dealmaker. He helped to organise peace talks between Ivan Glasenberg, Glencore chief, and Mick Davis, Xstrata chief, which paved the way for an $90bn merger of the two commodities groups in 2013.

Representatives at M Klein & Company, Mr Klein’s advisory group, could not be reached for comment.

The failure of the Kraft Heinz approach for Unilever is a rare stumble for Mr Buffett and his partners at 3G.

The latter is known for adopting aggressive cost-cutting tactics that are upending the consumer goods industry. They have taken stakes in the beverages group Anheuser-Busch InBev and Restaurant Brands International, the owner of the Burger King and Tim Hortons restaurant chains.

Last week, Unilever said the aborted bid had been a “trigger” for it to work harder and faster on delivering better returns to investors. It has launched a review of its business to be concluded by early April.

This article has been amended to clarify the relationship between Tony Blair and Michael Klein. They worked together on deals rather than founding a firm.

FT : Deutsche Bank cuts bonus pool by ‘almost 80%’

Deutsche Bank cuts bonus pool by ‘almost 80%’
Executive announces figure as German lender looks to shore up its finances
Deutsche Bank has cut its 2016 bonus pool by “almost 80 per cent”, one of its top managers has said, as Germany’s biggest bank battles to shore up its financial position in the wake of heavy fines.

Karl von Rohr, chief administrative officer at Germany’s biggest bank, acknowledged in an interview with the Frankfurter Allgemeine Sonntagszeitung newspaper that bonus reductions were “frustrating” for staff, but said that the decision had been taken “very consciously, also bearing in mind our shareholders”.

Deutsche’s investors have not received a dividend for the past two years, as the bank has slipped deep into the red, posting a record €6.8bn net loss for 2015, and a €1.4bn loss for 2016 amid a raft of litigation and restructuring charges.

In late December, the bank reached a $7.2bn deal with the US Department of Justice to settle allegations that it mis-sold mortgage-backed securities before the financial crisis, and in January it agreed to pay $630m to settle US and UK investigations into alleged mirror trades used to launder $10bn out of Russia.

In the wake of the settlement with the DoJ, John Cryan, chief executive, said Deutsche’s management board had decided to waive their bonuses for 2016. He also said employees with the titles vice-president, director and managing director would receive no individual bonuses for 2016, although they would still be eligible for a group-wide bonus linked to the bank’s overall performance.

Deutsche said in January that the move would affect about 25 per cent of its staff but did not spell out how big the reduction to the bonus pool would be in monetary or percentage terms.

In 2015, the bank’s bonus pool was €2.4bn. Precisely how much this number declines in 2016 will depend on share awards from previous years, as well as the cut in new awards mentioned by Mr von Rohr.

The cut in Deutsche’s bonus pool comes amid a broader debate over the level of executive pay in Germany, which is home to some of Europe’s biggest companies and is gearing up for a general election later this year.

The centre-left Social Democrats, which govern the country in coalition with Angela Merkel’s centre-right Christian Democrats, last week proposed draft legislation that would limit the tax deductibility of the salaries of top managers at public companies to €500,000.

On Friday, the carmaker Volkswagen, which came under fire last year after board members received big payouts despite the company suffering its worst ever financial year, said it would introduce a new pay system that would cap the salary of its chief executive at €10m and limit other management board members’ pay to €5.5m.

FT : The man who scuppered Unilever Kraft Heinz

The man who scuppered Unilever Kraft Heinz

It was Klein who, according to FTAV’s impeccable sources, called Warren Buffett on the Sunday after Kraft Heinz’s $143bn bid for Unilever leaked, warning the Berkshire Hathaway chairman that he was walking into a political firestorm.

Klein put Buffett on a call together with Unilever chief executive Paul Polman, and that was that.

Just one phone chat is all it took.

Why it fell to Klein to point out the bleedin’ obvious, rather than the raft of other advisers on what would have been the second largest takeover of all time, is not quite clear. The stresses around Theresa May’s government, when it comes to industrial policy and jobs, have been pretty visible — even to those based on the other side of the pond; meanwhile, parliamentary elections in the Netherlands, home of half of Unilever, have been in the diary (March 15) for some time now.

Buffett and his cold-blooded Brazilian friends at 3G, were set for a roasting on both sides of the Channel that would have lasted months — even if the fiercely-resistant stance of Unilever’s Polman had eventually softened.

Klein’s a low-profile chap, probably best known in the UK for running an informal double-act advisory operation with Tony Blair, the former British prime minster. It was the duo, for instance, who brokered a short-lived peace between Glencore’s Ivan Glasenberg and Xstrata’s Mick Davies that allowed the former to take over the latter five years ago. Now Klein’s shown he can undo big deals as well as cement them.

A former Citigroup corporate financier, he now operates in stealth mode, simply as M. Klein & Co; Blair, on the other hand, has given up galavanting around central Asia and the Middle East, turning his attention to resisting Brexit instead.

FT : Financial executives sceptical on London’s future

Financial executives sceptical on London’s future
Survey finds bankers expect New York to benefit from Brexit

Financial groups are betting on New York rather than London being the big winner from Brexit, a new survey of senior executives has found.

Confidence in the UK’s position as a global financial centre is weakening among professionals around the world, according to a new survey by Duff & Phelps, the corporate financial advisory firm.

While 36 per cent named London the pre-eminent financial hub this year compared with 58 per cent picking New York, that figure plummeted when it came to forecasting the world’s most important financial centre in five years’ time.

Just 16 per cent of respondents chose London to top the table in 2022 but those picking New York remained steady, according to the survey of 183 senior executives at investment banks and asset managers across the globe.

Roughly 390,000 people currently work in financial services in London, compared with 330,000 in New York, according to the Bank of England.

The UK is due within a matter of weeks to trigger the official Article 50 two-year divorce proceedings by which it will leave the EU.

The Duff & Phelps findings come after recent upbeat statements from financial companies. Jes Staley, the chief executive of Barclays, said last week that the bank believes London will retain its position as Europe’s financial hub, while Unigestion, the Swiss investment house, has made similar statements.

A significant part of London’s historic business has rested on serving as a gateway to the rest of the EU. US investment banks, for example, have based themselves in the City and then used an EU “passport” to provide services to the other 27 nations without having to set up expensive subsidiaries on the continent.

With hopes of retaining passporting rights dwindling, the UK may seek to maintain a regulatory regime that is broadly equivalent to that in Brussels as a way of preserving some kind of access. It may instead opt to lighten regulatory rules in an attempt to attract more business.

“Recent political turmoil coupled with scepticism regarding the efficacy of financial regulations means uncertainty reigns in most financial compliance departments today. Although the UK is expected to be in a good position in terms of third-country equivalence, firms are looking for further stability from regulators,” said Julian Korek, managing director at Duff & Phelps.

“Fund managers and bankers clearly lack confidence in the current regulatory regime, which may provide a level of support for those governments seeking to make significant changes,” he added.

While the Article 50 divorce process runs over two years, more than a third of respondents to the survey expect that Brexit will affect their compliance arrangements either immediately or within 18 months. A handful replied that changes have already begun to be implemented.

The survey’s respondents were generally sceptical of the current regulatory regime, with just one-in-ten agreeing that changes since the financial crisis had done enough to prevent future crashes.

However, recent rules around the world — including in Hong Kong, the UK and the US — to make senior executives more accountable for failings on their watch were considered to be consequential: 54 per cent of respondents said such regimes have a positive impact on the financial services industry.

(ZH) Goldman Perplexed By The "Relentless Bull Market"

Goldman Perplexed By The "Relentless Bull Market"

It has now become a weekly ritual: Goldman warns the market is overvalued and poised for a selloff, market proceeds to ramp to new all time highs.
It was just last weekend when Goldman's chief equity strategist, David Kostin warned that investors will soon realize they were too optimistic, pointing out that the "S&P 500 has returned 10% since Election Day while consensus 2017E adjusted earnings have been lowered by 1%", and adding that "we are approaching the point of maximum optimism and S&P 500 will give back recent gains as investors embrace the reality that tax reform is likely to provide a smaller, later tailwind to corporate earnings than originally expected."
What happened next is familiar: the Dow proceeded to notch five consecutive all time high in the following week, closing at a new record on Friday afternoon.
So has Goldman thrown in the towel? Not at all, and in a note over the weekend, Kostin is now clearly perplexed by what he dubs a "relentless bull market", is now making not only short-term predictions, but urging Goldman's clients to "replace long equity positions with calls or sell unlikely upside to fund protection."
Some more details: in a note from Friday evening, asking "How to position in a relentless bull market given a long list of near-term drawdown", Goldman observes that "It has been a year since the last 10% US equity market drawdown but long periods of stability are not good indicators of drawdown risk. In recent years, investors have bled premium by hedging positions while stocks continued to climb. Looking ahead, the distribution of market outcomes appears asymmetrical. Near-term downside catalysts include (1) investor recognition that lower corporate tax rates may not take effect until 2018; (2) multiple Fed hikes; (3) European elections. We forecast S&P 500 will peak in 1Q at 2400 and end the year at 2300. Given extremely low volatility, investors should replace long equity positions with calls or sell unlikely upside to fund."

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In short, while Goldman's top equity strategist is perplexed (or at least so he would like to appear, even though virtually all of Trump's economic advisors are his former colleagues and Goldman's stock has soared over 30% since the election), his advice is for clients to get out in the next 5 weeks (when Q1 ends), and to "replace long equity positions" while selling unlikely upside to take advantage of the extremely low volatility.
Below are the details of Goldman's latest bearish thesis:
“August in February” describes both the weather and trading activity this week. As temperatures in Manhattan climbed into the high 60s (20º C), equity volatility continued to fall. S&P 500 realized 3-month volatility now ranks in the 1st percentile of the last 50 years. It has been more than two months since S&P 500 moved more than 1% intraday. Earlier this month marked a full calendar year since the last 10% US equity market drawdown. The S&P 500 declined by 14% in February 2016. It has been more than seven months since the last 5% drawdown (6% in June 2016), and 93 trading days – more than four calendar months – since the S&P 500 last experienced a daily decline of 1% in early October. The last time the market exceeded that stretch was 94 days in 2006.
Long periods of market stability are not good indicators of drawdown risk. Since 1980, there have been only six instances of the S&P 500 trading for 80 or more consecutive days without a 1% decline. Following the end of these stable market periods, the S&P 500 actually registered a positive three-month return in five of six episodes, with a median 6-month return of 9% and a 12-month return of 15% (Exhibits 2). In short, following previous periods of market stability, the S&P 500 usually continued to march higher.
Extreme positioning of US equity investors is generally a contrarian indicator, but the market has continued to climb amid widespread bullishness. Our Hedge Fund Trend Monitor published this week showed that hedge funds currently carry their highest net long exposure since 2015. Similarly, our Sentiment Indicator based on S&P 500 futures positions reads a 100 this week on a scale of 0 to 100.
Although the indicator is more useful in signaling market upside following low values, readings above 90 have been statistically significant indicators of modest downside risk during the subsequent month. The S&P 500 has continued to reach new record highs despite SI readings above 90 for nine of the last 10 weeks.
The clearest potential tailwinds for S&P 500 upside include government policy and acceleration in US economic data, but neither catalyst looks likely. Investor optimism in recent months has been driven in large part by hopes for lower corporate tax rates. However, our Washington, D.C. analyst believes the political climate suggests that tax reform likely will not go into effect in 2017. Meanwhile, recent economic data have been strong, but the high level of our economists’ MAP index of data surprises as well as the 3.6% pace of US economic growth signaled by their Current Activity Indicator place a high bar for upcoming data releases to maintain the current pace of economic acceleration and drive further share price appreciation.
The distribution of market outcomes appears asymmetrical in our view, but the market will likely continue to grind higher until a catalyst sparks a drawdown. Upcoming weeks include a number of major risks:
  1. US government policy: Next Tuesday, Feb. 28, President Trump will present his State of the Union to Congress. Trade with China has been notably absent from recent headlines despite constituting a central pillar of his campaign. Protectionist trade policy is a risk lurking under the surface.
  2. US monetary policy: Although most investors expect two or three FOMC rate hikes this year, the market prices just a 22% likelihood of a hike at the FOMC meeting on March 15. PCE inflation data released on March 1, Chair Yellen’s planned speech on March 3, and/or the monthly jobs report on March 10 could raise the odds of a hike sooner than is currently expected.
  3. European elections. In a busy calendar of European elections, the first round of the French presidential election will occur on April 23, with a potential run-off scheduled for May 7.
Fund managers are currently caught between a long list of risks and a market climbing steadily to new record levels.
Our 2017 outlook remains that S&P 500 will peak in 1Q at 2400 and then fade to 2300 by year-end. Firms will not benefit from lower tax rates until 2018 and the Fed’s bias is to tighten. But following years of watching cash and hedges drag on returns, it is difficult for investors to miss out on potential upside or spend premium for protection in a market that continues to grind higher. Although European implied volatility shows a “kink” around the French elections, US equities reflect little to no implied risk from the events listed above. Unfortunately, drawdowns rarely announce themselves to investors in advance.
Investors seeking to own US stocks while protecting against upcoming risks can take advantage of extremely low volatility by replacing cash equity holdings with calls. Call options offer unlimited upside participation but risk just the cost of the option if the market falls or stops rising. Investors who are already long but find themselves concerned with the asymmetric risk profile can sell unlikely upside to protect against drawdown risk. An investor can sell a 2410 (+2%) S&P call with a June 30 expiry and use the premium to buy a 2240 (-5%) put. This strategy protects investors from a drawdown of 5% or more during the next four months while allowing participation to our upside forecast level of 2400. June 30 expiry captures the potential event risks listed above as well as the June 14 FOMC meeting. Our economists assign a 90% probability of at least one Fed hike by then while futures imply a much lower 67% likelihood.

    WSJ : China’s Huawei Battles to Own the Next Generation of Wireless Technology

    China’s Huawei Battles to Own the Next Generation of Wireless Technology
    To develop 5G, company deploys an R&D staff 80,000-strong, challenging Europe’s dominance

    VIENNA—Telecom firms from around the world dispatched their top engineers to the Austrian capital late last year for a discreet, but strategic round of meetings aimed at defining capabilities and specifications of future wireless networks known as 5G.
    As delegates huddled in the gilded conference room of Vienna’s InterContinental Hotel, one company logo prominently dotted several rows of tables: the red flower of Huawei Technologies Co., the Chinese telecom-equipment giant.
    “They’re twice as many as anyone else,” said the senior representative of a Western rival as he entered the room, in which a Wall Street Journal reporter was allowed on the condition participants weren’t identified by name. “They’re everywhere.”

    The wireless telecom industry is experiencing a tectonic shift.
    European and U.S. equipment suppliers such as Ericsson AB, Nokia Corp., which includes the former Lucent and Alcatel, and Qualcomm Inc., long dominated the sector, having fathered most of the technologies behind existing mobile networks. But Asian rivals have gone on offense, using the international process under way to define 5G standards to challenge the established order.

    Huawei has already overtaken Sweden’s Ericsson as the world’s largest supplier of wireless equipment by revenue, according to some estimates. The global market for wireless equipment was $48 billion in 2015, data from IHS Markit show, of which Huawei, Ericsson and Nokia control about 80%.
    Huawei executives say the Chinese company initially gained traction by replicating Western technology, and offering quality products at lower costs. With an army of 80,000 staffers working on research and development, however, Huawei has now become a formidable lab force.
    That could give Huawei a sizable edge at a time when all suppliers have set their sights on 5G—the technology promises to be a wellspring of revenue by allowing for faster speed and smoother interaction between connected objects—but don’t all have deep pockets.

    Ericsson and Nokia are both cutting costs and jobs. The two Nordic companies sent smaller delegations to the four-day meeting in Vienna, where telecom firms fought to influence the future design of 5G, which is expected to be rolled out commercially early in the next decade. The meeting, organized by the 3rd Generation Partnership Project, attracted around 300 participants.
    “We in Europe took our success early on in the cellphone [business] for granted,” Ericsson Chief Executive Börje Ekholm said in a recent interview in Stockholm.
    Cisco Systems Inc., Qualcomm and other U.S. suppliers of telecom equipment are partly shielded from Huawei’s rise because the Chinese company has been essentially shut out of the American market after a congressional report deemed it a risk to national security.
    Yet, Western executives and analysts warn Huawei could gain meaningful, indirect access to the U.S. market if it holds some of 5G’s key patents. Huawei denied it followed such a strategy, saying it participates in joint innovation activities world-wide to promote a consensus on standards.


    After meetings such as the ones in Vienna, the International Telecommunication Union, a Geneva-based United Nations agency, will specify final 5G standards, listing which patents are essential to the technology starting in 2019, said Dimitris Mavrakis, an analyst at technology consultancy ABI Research.
    “You won’t be able to deploy or create a 5G network without these essential patents,” he said.
    The first large-scale cellular networks, often referred to as first generation or 1G, were deployed in the 1980s, and relied on national technologies that were rarely compatible. That proved a particularly big headache for telecom carriers and subscribers in fragmented Europe.
    In 1982, a European group of national post and telecom agencies set up an association called Groupe Special Mobile, or GSM, with the aim of designing a pan-European mobile standard. The initiative was quickly endorsed by national governments and European authorities, forcing European equipment suppliers to fight for slices of GSM technology. It bore fruit in 1991, when Finland launched the first commercial GSM network.
    Developed as a multinational standard from the get-go, GSM was adopted by carriers in Russia, China and even the U.S. The standard became a byword for 2G networks as it eclipsed rival U.S. technologies such as CDMA.
    GSM made the fortune of companies such as Ericsson and Nokia, which supplied large parts of the necessary equipment or owned patents that generated a windfall in licensing revenue.
    “The path was shaped up by Europeans,” said Jorma Ollila, who was chief executive of Finland’s Nokia from 1992 to 2006. “Europe was the winner of that geopolitical game.”
    The standard-setting process became more international in the 1990s, when ITU, the U.N. agency, oversaw the development of 3G. At the time, Huawei was busy manufacturing GSM equipment under license, mainly for operators in rural China. Europeans succeeded in retaining key positions within industry working groups, maintaining extended sway over patent-picking decisions.
    The battleground became more disputed in the following decade as Huawei, founded in 1987, expanded in-house research capacities and became involved with the design of 4G.
    Huawei “went from zero to being a big contributor to the whole standardization process,” said Michael Thelander, a consultant at Signals Research Group.
    Building on its success in securing 4G patents, Huawei became a leading supplier of wireless equipment, even winning over clients on Ericsson’s and Nokia’s turf in the Nordics. Huawei also diversified in handset making, a business the Nordic companies have abandoned.
    In 2016, Huawei said its revenue shot up 32% to 520 billion yuan ($75.7 billion). In the same period, revenue fell 10% at both Nokia and Ericsson.
    In the race for 5G dominance, executives at European equipment suppliers said Huawei tends to saturate working groups with design proposals that aren’t always relevant, going for quantity rather than quality. A Huawei spokesman said the company’s research was “professional, collaborative and based on a significant contribution to investing in research and development.”
    After hearing some of Huawei’s proposals for 5G design in Vienna, the senior Western company representative said: “If they threw the same resources with the quality of Ericsson or Qualcomm, it would be game over.”


    The Road to 5G
    Like previous international wireless-network technologies such as 3G and 4G, 5G will result from prolonged negotiations during which equipment suppliers leverage their proprietary technologies to jockey for maximum influence on final design.
    • December 2016
      Telecom companies submit proposed 5G standards to 3GPP, an industry consortium.

    • March 2017
      3GPP starts selecting proposed 5G standards.

    • June 2018
      3GPP finalizes package of proposed 5G standards.

    • 2018
      Later in the year, United Nations telecom agency ITU starts evaluating 5G standards.

    • 2019
      ITU starts locking down 5G standards.

    • 2020
      First expected commercial deployments of standardized 5G

    WSJ : There May Be a Huge Brexit Fight Over Financial Plumbing

    There May Be a Huge Brexit Fight Over Financial Plumbing
    London is a global clearing hub and trillions of dollars flow through the capital every day

    Britain will have many contentious skirmishes during its negotiations to leave the European Union. But one, deep inside the financial system’s plumbing, is shaping up to be especially thorny. It is about the clearing of securities. London is a global clearing hub, and trillions of dollars flow through the capital every day. Will London lose this crown? And what will it mean if it does? Here’s what you need to know, based on interviews with clearing executives, lawyers and consultants.

    What is clearing?

    A clearinghouse sits between the buyers and sellers of instruments such as bonds, commodities and derivatives. It gives buyers comfort they will get what they bought and sellers comfort they will get paid. To do this, the clearinghouse steps in between the two parties, pledging to complete the deal even if one side reneges.


    Why is so much clearing done in London?

    Clearing is a scale game and the City of London has heft, especially in derivatives. Last April, $1.2 trillion of interest-rate derivatives were cleared through London every day, in currencies including dollars, yen and euros, making Britain the second-largest clearing destination in the world after the U.S., according to the Bank for International Settlements.

    Why does scale matter?

    Scale saves money. A bank must hold capital against its trades to cover its risk. Let’s say a bank makes a bet with Client A that interest rates will rise, and a bet with Client B that they will fall. If a bank trades directly with the clients, both of those positions have risk and require capital.

    Run through a clearinghouse, though, the bank has two offsetting bets with the same counterparty: They cancel each other out. Done over thousands of contracts, this netting results in a much smaller position.

    Clearinghouses can also help banks “compress” positions, for instance by consolidating several trades into one.

    The more contracts going through one clearinghouse, the more netting and crunching down of contracts can take place, and the more efficient it is for the parties who use it. London has benefited from this snowball effect.

    How would Brexit affect this?

    It could break up this pool of contracts.

    How?

    As part of the EU, the U.K. benefits from global agreements that make it easier for banks from around the world to clear through “qualified” EU clearinghouses, such as the London clearinghouses.

    Brexit could see the U.K. frozen out of this system. Once it leaves the EU, the U.K.’s clearinghouses could lose that qualification. The European Central Bank could also withdraw its commitment to stand behind clearing in euros in London as lender of last resort. Global banks might then start going elsewhere, eroding the scale advantage.

    Can the U.K. requalify?

    In theory this should be easy: Most London clearinghouses already adhere to the same rules as their European counterparts, who themselves are already equivalent with other countries. But this could take time. It took the EU and U.S. four years to reach a deal on clearing. (People who worked on that agreement say the job could be done in months.)


    So what’s the problem?

    Brexit negotiations. European authorities might not be so eager to approve a clearing deal while other items are outstanding.

    Qualifying is important. European rules are being rolled out to require that credit-default swaps and interest-rate swaps be cleared through qualified clearinghouses. Other products can be cleared through nonqualified clearinghouses but will be hit with a higher capital charge.

    Is that all?

    No. European authorities could try to force clearinghouses that handle large amounts of euro-denominated securities to be located in the EU.

    Why would Europe want to do that?

    Some policy makers are concerned about the idea that the U.K. would handle trillions of euros of derivatives while being outside the reach of the continent’s regulators or courts. Pushing trades through clearinghouses is a key part of Europe’s postcrisis market reforms.

    London clears more euro-denominated interest-rate derivatives than the other EU countries combined—some 75% were executed in the U.K. last year. LCH.Clearnet Group Ltd. is the largest global clearer of euro-denominated interest-rate swaps. ICE Clear Europe Ltd. is the biggest clearer of euro-denominated credit-default swaps. Both are based in London.

    There is another reason: If more clearing activity moves into the EU, then expertise and capital to back those trades would follow. That would bolster the EU’s effort to forge its own financial center.

    How could EU authorities make this happen?

    1.) Change the law. The European Central Bank could be given direct supervision of clearinghouses that handle lots of euro-denominated contracts. This could take years of political wrangling. A quicker solution: Apply thresholds to the amount of euro contracts “qualified” clearinghouses can process outside the EU. This could be tailored to be high enough not to affect the U.S. houses (which don’t do much euro business) but inflict pain on British businesses.

    2) Cut off the Bank of England. The ECB could remove swap lines that provide emergency euro liquidity to the Bank of England. Clients might get cold feet when they realize their euro-denominated contracts aren’t backed by unlimited ECB cash. On the flip side, central banks don’t usually like to create financial instability.

    3) Strike a deal. During the Brexit negotiations, the U.K. government could relinquish control of clearinghouses in return for something else. Whole chunks of clearing business could migrate to the EU, retaining that vital scale effect.

    4) Hit the banks. The ECB could turn the screw on eurozone banks that use London clearinghouses. It could increase capital requirements for banks that clear euro-denominated securities outside the EU. Playing hardball could backfire, though. If locked out of London, EU-based banks might choose a bigger “qualified” venue—in New York, for instance—instead of Europe.

    How onerous could it be to push clearing out of London?

    Quite. Trades could be gradually moved from a London clearinghouse to a continental one, but there is still the substantial headache of reworking contracts written in English law into a host of European countries, each with different legal systems.

    How big a threat is this to banks in London?

    It is far from existential, but it could be costly. Major banks are already planning to build out subsidiaries in the EU after Brexit. This should give them local regulatory clearance to apply for memberships of clearinghouses on the continent. The cost and structures needed to then route trades through these entities remain a big question.

    So how does this play out?

    Bankers and clearing executives hope some sort of agreement will be reached under which any changes are phased in over a long time. Compromises could be found. Clearinghouses in London could register in the EU, for instance, allowing regulators there to have better oversight.

    What about London’s position as a financial center?

    Euro-denominated interest-rate derivatives accounted for a quarter of all the cleared trades in all the markets of the world last year. Much of that went through London. Finance executives say that cutting off euro-denominated trades alone probably isn’t big enough to turn the capital into a financial backwater overnight, but it could add to a cumulative effect.

    What about jobs?

    Clearing employs very few people directly. ICE Clear Europe, for instance, has around 80 people working directly on clearing matters. How their departure would reverberate through the network of lawyers and consultants who work with them is unquantifiable. Consulting firm Oliver Wyman estimates that exchanges, clearing and interdealer brokers generate up to £4 billion ($5 billion) of annual revenue and employ up to 12,000 people in Britain. They won’t all leave. The U.K. will continue to attract financial business thanks to English law, its language and time zone.