The EU is looking to move out from under post-Brexit London’s significant influence on a key financial mechanism.
It said yesterday that it has reached a provisional deal to try and end the bloc’s reliance on London for clearing Euro derivatives. Clearing makes sure a stock, bond, or derivatives trade is completed – even if one side of the transaction goes bust.
The majority of clearing in interest rate swaps (IRS) in Euros is done by the London Stock Exchange Group, by US exchange operator ICE. Brussels however wants to bring the oversight to EU regulators where euro clearing for banks and asset managers in the bloc are concerned.
Even after Brexit, around 94 percent of Euro denominated swaps took place at London Clearing House (LCH), according to figures from Clarus.
The new agreement establishes an “active account requirement” for firms. This means banks must have an account with an EU-based clearing house to clear contracts.
Vincent Van Peteghem, finance minister for current EU president Belgium, said: “This will bring more clearing services to Europe and enhance our strategic autonomy.”
Several exchanges – including US Nasdaq, Deutsche Boerse and Swiss SIX Group’s Madrid Exchange are already aiming to attract businesses away from London.
“It will also contribute to stabilising the market and make sure it functions efficiently, which is a prerequisite for a fully-fledged capital markets union,” he added.
But it has not been met with full consensus. Markus Ferber, a German centre-right member of the parliament, said the City of London actually won out from the agreement because the amount of “preconditions, exemptions and review clauses” meant it was just a “tiny step”.
He said: “The big winner of last night’s agreement is the City of London that benefits from the status quo. In particular, the French government has once again not taken a European perspective, but has done the bidding of large US investment banks.”
Other critics have claimed the plans will raise costs for banks and asset managers, as they will have to establish multiple pools of liquidity.
The EU has given London-based clearing houses equivalence until June 2025. However, it could take years for significant volumes to move from London to mainland Europe.
Some business has already gone to the US.
There are requirements to demonstrate that the accounts are actually being used, including for “counterparties above a certain threshold to clear trades in the most relevant sub-categories of derivatives of substantial systemic importance”.
A Joint Monitoring Mechanism will be created to keep track of the new stipulations.
