- The EU wants to end its dependency on London after Brexit
- Could be another blow for City amid competition
- Banks have warned the EU not to be too stubborn
LONDON, Nov 28 (Reuters) – Banks and other market participants in the European Union must demonstrate to regulators that they do not overly rely on clearing houses in London to settle their derivatives transactions, a draft EU document seen by Reuters shows.
The EU has long wanted to end its heavy reliance on London-based clearinghouses like London Stock Exchange Group’s LCH (LSEG.L) for clearing euro-denominated interest rate swaps, particularly now that the UK is no longer a member of the bloc.
Brexit has resulted in much of the UK financial sector being cut off from the EU, but Brussels has allowed clearers in London to continue serving clients in the bloc until June 30, 2025.
Losing trillions of euros in clearing deals would be another blow to the city as it faces new competition from EU financial hubs like Paris and Frankfurt, alongside long-standing rivals like New York and Singapore.
Global banks have warned Brussels they could clear deals in the United States if the EU is too insistent.
The EU’s executive body, the European Commission, has proposed in draft legislation that market participants must have an “active account” with a minimum level of activity, to be determined, with a clearing house in the EU.
“It is appropriate to require financial counterparties and non-financial counterparties to hold, directly or indirectly, accounts with a minimum level of activity with clearing houses established in the EU,” reads the draft.
Clearers are backed by a default fund to ensure trades are completed even if one side of the transaction goes bust.
The measures aim to safeguard financial stability by ending “overexposures” to “some” non-EU clearers, the draft added, with the minimum level of activity by the EU’s European Securities and Markets Authority (ESMA). and other regulators in the block.
“Furthermore, ESMA should indicate appropriate transitional periods for the gradual implementation of this requirement,” the draft reads.
ESMA would conduct a public consultation and publish a cost-benefit analysis. Market participants must report to regulators the extent to which they use foreign clearers.
‘PRAGMATIC’
About 60% of EU clearers’ EU clients already have an account for rate swaps, 85% for credit default swaps, but many of the accounts are not used regularly, a step that Deutsche Boerse’s Eurex Clearing in Frankfurt wants to remedy voluntary basis before EU law.
The Commission is due to publish the draft law on December 7, with the European Parliament and EU states having the final say.
The EU wants to increase “strategic autonomy” in its capital market, to encourage companies to raise funds by issuing shares on bonds and to ease reliance on bank loans.
An industry representative said the proposals are “pragmatic” and focused on building internal clearing capacity by making it easier and faster to approve new products and risk models at EU clearing houses to keep up with market changes.
Global banks have warned Brussels that severe, mandatory measures forcing them to move euro derivatives clearing out of London would backfire on EU banks, which need access to global liquidity pools in London, and clearing activities in the United States could relocate.
The proposals also address problems that have surfaced in commodity derivatives markets this year as energy prices soared in the wake of the Russian invasion of Ukraine. This left energy companies unable to meet collateral requirements for their derivative contracts and forced governments to step in.
The draft law tentatively proposes to require EU commodity derivatives clearing houses to maintain a stand-alone default fund for that particular asset.
ESMA should also review the rules for clearing commodity derivatives to see whether there should be a better distinction between agricultural, energy and metals contracts or based on other characteristics such as environmental, social and governance criteria, green investments or crypto-related characteristics is required,” the draft reads.
Reporting by Huw Jones Editing by Gareth Jones, David Goodman and Andrew Heavens
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