How the French helped Britain keep euro-clearing
in Brexit surprise
Some in Brussels thought Brexit was a chance to
reroute financial ‘plumbing’ away from London but the banks still had eyes for
the U.K.
FEBRUARY
21, 2024 4:00 AM CET
BY FIONA
MAXWELL, KATHRYN CARLSON AND HANNAH BRENTON
https://www.politico.eu/article/france-helped-britain-keep-euro-clearing-london-brexit/
LONDON — As
soon as the Brexit referendum result was in, some in Brussels spied an
opportunity to dent the City of London.
But after
nearly eight years of wrangling, EU policymakers reached a deal this month
which will draw some business into the bloc, but far less than expected.
What’s
more, the agreement was made possible because the French sided with its
country's banks, who wanted to continue using U.K. clearinghouses, denying
Germany — and Deutsche Börse in particular — a win.
The saga
has dominated finance policymaking circles in the years since Brexit and
strikes at the heart of the question of whether the City of London can retain
its global prowess outside the EU.
“The
picture is far from rosy, but it's much better than what we thought or what we
could have expected, given what was coming our way,” an individual working in
public policy in the City of London said, who declined to comment on the record
given the sensitivity of the topic.
The
arrangement agreed between Brussels policymakers could feasibly have seen
significant amounts of trades taken from U.K. clearinghouses and forced into EU
ones. Just last September, ECB staff unofficially lobbied governments to
require EU banks to move 30 to 40 percent of their trades from London.
The final
deal is expected to result in a far smaller percentage moving over, so it's
being chalked up as a big win: for EU banks, which don’t want to quit U.K.
clearinghouses, and for London, where, despite the rhetoric, cutting off the
City post-Brexit has proven impossible.
Love for London
Clearinghouses
are generally viewed as the “plumbing” of the financial system — they act as a
middleman in transactions, providing a kind of insurance so if one party fails,
there isn’t a ripple effect throughout the economy as was seen in the 2008
financial crisis. U.K. clearinghouses — and one in particular, LCH — have
always been the most popular choice for banks across the globe.
The EU’s
love for London’s clearinghouses comes down to convenience and money: LCH has
been the clearinghouse of choice for decades, and it’s cheaper for banks to
have all their business in one place.
“Clearing
is structurally a winner-takes-all business,” said Christian Edelmann, managing
partner co-head of Europe, at Oliver Wyman, a management consulting firm.
The use of
clearinghouses was made mandatory following the financial crisis, and their
politicization harks back even to before Brexit, when the European Central Bank
tried to force EU lenders to clear their euro-denominated trades
("euro-clearing") in the bloc. Ultimately the ECB lost against the
U.K. in a landmark court ruling, but after Brexit it became the number one
political issue in financial services.
Given the
importance of clearinghouses, Brussels has temporarily allowed EU banks to use
U.K. ones until June 2025. The intention was that short-term access would give
Europe time to cut the City of London off completely.
The saga has dominated finance policymaking circles in
the years since Brexit and strikes at the heart of the question of whether the
City of London can retain its global prowess outside the EU |
French volte-face
Two issues
dominated the final deal between the EU executive, lawmakers and
governments: how much supervision
countries would give up to the EU-wide markets regulator, and the number of
financial trades that would need to take place in EU clearinghouses under the
rules.
The latter
was the most divisive: The debate centered on an “active account” proposal,
which, as it sounds, would require EU banks to hold an account at a bloc-based
clearinghouse, and have a certain number of trades in that account.
Given the
subject of the discussions was a piece of EU legislation that would drag
business into the bloc, potentially benefiting countries financially, as well
as improving their oversight of key financial trades, it came as a surprise
that the two opposing sides were not the U.K. and the EU, but France and
Germany.
While Paris
is normally in favor of steps that bolster Europe’s political prowess, known as
"strategic autonomy" in Brussels speak, when it came to
euro-clearing, it was France that sealed the deal that would benefit the U.K.
France
decided to firmly row in behind its banks ― backing their stance that they
stood to lose international business and face higher costs if euro-clearing was
forced over the Channel.
“There is a
cost to moving clearing to the EU. Reducing European banks’ access to UK
clearinghouses decreases the strategic autonomy of banks and their clients,”
said Perrine Herrenschmidt, head of Brussels office, European public policy at
the International Swaps and Derivatives Association.
Germany, on
the other hand, stood to benefit from LCH being cut off, as the potential
competitor — Eurex, part of Deutsche Börse — is based in Frankfurt.
French-German feud
Political
wrangling between Paris and Berlin took center stage. Why would France want
Germany to win this important piece of finance? Moving euro-clearing to
Frankfurt would not only cause pain to France’s banks, but would put a spanner
in the works of Paris’ dream of being the EU’s top financial center.
Plus, there
was a feud over who gets to oversee the business. Ironically, moving
euro-clearing to Frankfurt would mean less EU supervision than in London. The
EU’s markets regulator — the European Securities and Markets Authority (ESMA) —
has greater sway over clearinghouses outside the bloc’s borders, yet doesn’t
have the same powers for those within the EU.
Instead,
German financial authorities would take over — and there's plenty of grumbling
in Brussels about their less-than-perfect track record. The French were
particularly keen that didn’t happen. ESMA does sit in Paris after all.
“It's clear
that mandating EU-specific clearing would increase some costs for at least some
intermediaries," said Nicolas Verón, senior fellow at the thinktank
Bruegel. "At the same time, that gives more control to the EU authorities
— but even that is complicated by the fact that there is no EU-level clearing
supervisory mandate."
London was
nervously grabbing the popcorn as the tussle went on.
Red lines and wiggle room
At the
eleventh hour, France and Germany played nicely for the sake of a political
deal.
European
Parliament lawmakers had made it clear that concessions on supervision from EU
governments were not enough for them to accept an overall deal. There had to be
some movement on the account requirement — a red line in governments’
negotiating mandate — or no deal.
And lo and
behold, France and Germany found some wiggle room together.
The two
countries — who hold the bulk of the voting weight among governments — agreed
that initial requirements for the number of trades that must be cleared in EU
accounts could be increased fivefold. Small potatoes compared to what the
requirement could have been, but movement nonetheless.
No one
knows yet how much this will actually affect the proportion of overall trades
being shifted from Britain to the EU. That’s because ESMA will determine
criteria which will affect the number of trades required to be carried out in
the bloc as they depend on the size of the clearinghouse and the type of
financial trade. Regardless, it would at most make a minor dent in London's
clearing capital.
As
policymakers and banks crunch the numbers, the headline news is a collective
sigh of relief — and it makes it increasingly likely the June 2025 date will be
extended.
“I don't
think there is any urgency from an EU perspective to disrupt the current
situation,” said Verón. “It is not necessarily a policy loss for the EU. Of
course, for Deutsche Börse, that's a different issue.”
For now,
the illicit love affair across the Channel can continue.
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