The EU and clearing houses; Physical attractiveness and career progression

Imagine, if you will, that you’re in school. You and your small group of friends decided, for whatever reason, you would transact with each other in Star Wars merchandise. You want Mark’s bag of crisps? That would be one battle droid figurine; you want to “borrow” Jenny’s completed homework as a “reference material”? That’ll be one Chewbacca. You want Ron to help you with an elaborate plan to cover up the fact that you’ve blown up every single glassware in the lab because you thought that throwing absurdly large chunks of alkali metals into water and watch them explode over and over again is pretty cool? That will definitely cost you. (But if you do end up being a great lithium battery safety engineer for electronics and electric vehicle applications, perhaps it’s not too steep a cost in retrospect?)

Then let’s say that, somehow, this whole idea of using Star Wars merchandise caught on with the rest of the school. In fact, it’s gotten so big that students who have never really interacted with each other also use it to pay each other for favours. But this might cause a problem - some students now complain that because they don’t necessarily have friendships with the students that they are transacting with, how would they know that their counterparty would eventually deliver the merchandise?

Fortunately, when there’s a need, there’s always going to be people who are going to tap that market wide open. Let’s say then that a few of the richer students with large personal collections start offering a service where they offer to intermediate by guaranteeing both the buyer and the seller. If the buyer doesn’t pay up with her Luke Skywalker action figure, the intermediary would pay the seller. But if she doesn’t get what she wanted from the seller, the intermediary would compensate her. In return, the intermediary gets some cut and/or perk in return.

And just like that, all of the sudden, your school now has some weird but nonetheless functional payments (you can buy and sell by transferring ownership) and clearing (intermediaries facilitating these transfers) systems for school favours.

But let’s say, a month down the road, Mickey Mouse caught wind of this, and decided to pay the school a visit, along with his team of lawyers. His lawyers have pinned posters on the school’s soft boards, declaring that everyone can transact in Star Wars merchandise, but only if these transactions are carried out on authorised Disney-affiliated payments and clearing systems. Otherwise, the Disney+ accounts of everyone in that school may be suspended (the horror!), among other legal actions that they may wish to pursue. 

Mr Mouse justifies all this as “this ensures the smooth operation of Star Wars merchandise-denominated markets as these affiliated payment systems providers and clearinghouses are thoroughly vetted and controlled by The Walt Disney Company, and we have full recourse should anything happen.”

Well, what are you to do?

Anyway, right up to the end of 2020, the UK played an extremely large role in clearing Euro-denominated securities. How big a role, you ask? Here’s a chart showing 2016 data for interest rate derivatives market share by country:

Source: UK Government Actuary’s Department

Clearly, the UK has an extremely huge chunk of the business, and that chunk in itself is very huge in absolute terms.

For those of you who prefer to look at more data at the expense of nice graphics, here’s a table showing 2018 data for all types of derivatives (i.e. not just limited to interest rates derivatives). As you can see under the “Intra-EEA” heading, a large proportion of counterparties are domiciled in the UK. If we exclude the UK, the EEA only has single digit market shares across all products.

Source: European Securities and Markets Authority

So in 2011, the European Central Bank thought to itself:

• The UK is not in the Eurozone (e.g. the UK does not use the Euro for everyday transactions);
• So that means that the ECB doesn’t necessarily have as much legal control over the UK’s financial system compared to one within the Eurozone;
• The perceived and/or actual lack of control over one’s own fate can be scary to some people;
• But it’s alright for the ECB, as long as most of the system is under ECB control.
• Wait, what do you mean that most of the euro-denominated derivatives clearing is not done within the Eurozone?
• Crap.
• We should get everyone to move it back.

So the ECB decided to publish the then-new “Eurosystem Oversight Policy Framework” that outlined that every clearing counterparty that exceeds a 5% threshold “should be legally incorporated in the euro area with full managerial and operational control and responsibility over all core functions, exercised from within the euro area”. (Section 6 of the Policy Framework)

This was bad news for the UK given its market share. If this goes forward, that would mean that the UK would either have to enter the Eurozone to keep this business, or to give it up altogether. Obviously, none of these options are politically good for the UK.

So what did the UK do? Naturally, it sued the ECB. (And Sweden came in to formally support the UK in court. France and Spain, in turn, supported the ECB.)

According to this court document, the ECB tried to first argue that “oh, this is just a policy framework. It’s not mandatory (yet). I don’t know why the UK is suing me for voicing my opinion.”

Well, the court ruled that, even if it might be a non-mandatory opinion, the ECB’s opinion carried practical weight - if banks within the EU start playing things cautiously and start refusing to do business with British clearing houses, that would very much jeopardize both the British clearing houses and therefore, given their size, the clearing system as a whole.

The ECB then argued that, “Well, we are just writing this policy framework on what we thought that everyone has already agreed a long time ago when they signed up to join the EU. Particularly this article in the many EU treaties that we should do whatever it takes to ensure price stability. The UK didn’t dispute that when they signed up to it, so we assumed that they are cool with this too.”

But the court more or less replied, “Yeah sure, but just because both of you have signed a contract, it doesn’t mean that one party can unilaterally alter the contract. Your change is substantial enough because you defined a threshold of 5% where there was none.”

The ECB then said, “But why should the UK have a say in this matter anyway? They don’t follow everything that we tell them to do.”

“No, the UK is entirely entitled to have a say in this matter. They had good lawyers and inserted this entire special UK-specific clause, therefore they have a say in this.”

The UK’s lawyers then came in and said, “We are going to present 5 bullet points on why the ECB can’t do this and cut off our business. The first bullet point is that the ECB’s mandate doesn’t cover clearing houses. Sure, the Treaties say that the ECB has power over payment systems, but there’s very little said on clearing houses. But just because payments and clearing are adjacent businesses, they are not one and the same. Therefore, the ECB should have no say in this matter.”

The ECB nodded, and said, “That is very true. If the EU member states want the ECB to have power over the clearing business, they would have written a better piece of legislation on it. Okay, UK, you win.”

“Wait, don’t you want to hear my 4 other bullet points?”

“Nope.”

“Really?” (The intern who didn't sleep for weeks quitely and sheepishly looks up to the judge from a corner of the courtroom)

“Yes.”

“Oh…. okay!”

Yes, the ECB literally said this in its judgement (emphasis mine):

In the light of all the foregoing, the first plea relied upon by the United Kingdom must be upheld and, without it being necessary to examine the other four pleas, it must be concluded that the ECB does not have the competence necessary to regulate the activity of securities clearing systems, so that, in so far as the Policy Framework imposes on CCPs involved in the clearing of securities a requirement to be located within the euro area, it must be annulled for lack of competence.

But now that the UK has left the EU, it’s pretty ironic that a lot of this business has moved away either back to the EU, or has gone tothe US (which I think this court case here plays a part, since you don’t need to be in the EU to clear these derivatives).

So, what’s the future like for the UK clearing business and your Star Wars merchandise transactions? Who knows. (I already hear some of you suggesting that if we moved transactions to the blockchain (e.g. Ethereum or Cardano or whatever decentralised self-executing smart contract framework that you can wrap real assets with, like this Ethereum-wrapped 1:1 collateralised gold crypto, which if you think about it, is like a gold ETF, but on a blockchain), there would be no need for clearing houses. But I guess the question really is, when is this going mainstream if at all?)

Physical attractiveness and career progression

Would you go further in life if you were physically attractive? Some of us think that “yeah duh, of course”, while others think that the world is a more meritocratic place now.

So here’s some empirical evidence that physical attractiveness does matter. This paper is the study of academia within the field of economics. I don’t think that I would be able to provide a better summary than the actual abstract, so here it is in full:

We document appearance effects in the economics profession. Using unique data on PhD graduates from top economics departments in the United States we test whether more attractive individuals are more likely to succeed. We find robust evidence that appearance matters for job outcomes. Attractive individuals are more likely to study at higher ranked PhD institutions, are more likely to find themselves in private sector jobs than in government jobs or in academia. Within academia, attractive PhD graduates are more likely to be placed at higher ranking institutions. More surprisingly, appearance also predicts research productivity on the job. Papers written by attractive individuals are cited more often. All these effects are not only statistically significant but are also substantial in magnitude.

In the same paper, it’s also pretty interesting have empirical data on perceived attractiveness by ethnicity (or at least as perceived by the participants who were tasked to judge):

Source: Galina Hale, Tali Regev and Yona Rubinstein

Here’s an older paper also showing roughly the same results, but this time for lawyers:

Source: Biddle and Hamermesh

Well, that’s life.

Yes, you can legislate against racial and gender discrimination. But it’d be very interesting to see if anyone would advocate and come up with the implementation detail to legislate against discrimination based on physical attractiveness or the lack thereof.

Originally posted on my Substack: https://aaronleong.substack.com/p/the-eu-and-clearing-houses-physical

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