City faces fresh post-Brexit blow as EU moves to
restrict certain trades
Battle focuses on what EU sees as bloc’s over-reliance
on London’s clearing houses handling euro-denominated derivatives
At the end of 2020, City clearing houses handled 90%
of interest rate derivative trades denominated in euros.
Jennifer
Rankin in Brussels
Wed 7 Dec
2022 13.51 GMT
The City of
London faces another post-Brexit blow to its dominance after the EU moved to
require firms to settle more financial-risk reducing trades within the bloc.
The plan
centres on trades in securities known as derivatives, and on financial market
clearing houses, the intermediaries that enable the transfer of funds to
sellers and financial products to buyers. Handling trillions of transactions
each year, they are deemed an essential part of financial market plumbing that
reduces risk.
Since
Britain voted to leave the EU in 2016, the subject has become a battleground,
as Brussels seeks to end what it sees as an over-reliance of European firms on
London for euro-denominated derivatives trades.
At the end
of 2020, the London Stock Exchange’s LCH clearing house handled more than 90%
of interest-rate derivatives, denominated in euros. These interest-rate swaps
are widely used by firms to protect themselves against unexpected changes in
borrowing costs.
Under draft
proposals issued by the European Commission on Wednesday, financial firms will
be required to clear a yet-to-be determined proportion of “systemic”
derivatives via active accounts in EU clearing houses. The minimum requirement
will be set by the EU regulator, the European Securities and Markets Authority,
one year after the law is adopted.
An EU
official said the legislation meant it was “less likely” that the commission
would extend a temporary deal that allows London’s clearing houses to continue
serving customers in the bloc. An “equivalence” decision granting permission to
Britain’s clearing houses to carry on the pre-Brexit trade expires on 30 June
2025, one of several temporary fixes agreed after Britain’s EU exit.
The
official stressed that decision would be taken by the political leadership of
the next commission, which takes office in 2024.
The plans
emerged as the boss of Europe’s largest exchange group said London’s standing
had slipped because of Brexit. “London used to be the largest financial centre
of the European Union and everybody liked it,” said Stéphane Boujnah, the chief
executive of Euronext, a pan-European organisation that competes with London
groups.
“Today,
London is the largest financial centre of the United Kingdom,” he told
Bloomberg Television,
Companies
choosing to float on stock exchanges outside the UK was becoming the “new
normal” he said, citing Ryanair’s decision to quit the London stock exchange
for a sole listing in Dublin and Universal Music Group’s choice of Amsterdam.
Nevertheless
– despite repeated Brussels pleas to reduce dependence on the UK – European
banks and financial firms continue to use London’s clearing houses. In a report
published last December, the EU regulator ESMA concluded that three UK clearing
houses were of “substantial systemic importance” to the EU and could pose
financial stability risks.
One EU
official said the commission didn’t have “a specific problem” with UK
regulations, but the bloc was over-reliant on external providers. “What recent
experience has told us, with the pandemic and the effects of the war [in
Ukraine], is that supply chains, no matter how robust they may seem from the
outside … are vulnerable.”
The
official added: “This is not to say we don’t trust people [or that] we don’t
trust [British] regulation. It is simply to say that if something goes wrong we
will be vulnerable.”
The plans
form part of the EU’s efforts to forge a “capital markets union”, an attempt to
make Europe’s fragmented financial centres more attractive to international
investors. The commission also wants to harmonise corporate insolvency rules
and make it easier for small companies to get stock market listings.
European
banks have warned that the clearing plans could backfire, saying they could
shift business to the United States.
The
proposals must now be agreed by EU finance ministers and the European
parliament before becoming law.
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