Word on the Web: Brussels and the City in euro-clearing battle

The European Commission has published draft laws to bring systemically important euro-clearing inside the eurozone. The City isn’t happy
by Eila Madden

The euro-clearing market had a rare day in the spotlight after the European Commission unveiled a draft law that would require “systemically important” clearing houses handling euro-denominated derivatives transactions to relocate to within EU borders. 

The announcement attracted criticism from across London’s financial services sector, which currently handles around €850bn of this business every day and could potentially lose this once the UK leaves the EU.

Szu Ping Chan and Lucy Burton at The Telegraph reported that the Commission’s announcement was the latest in a long-running and heated battle between Brussels and the City – which started after the vote for Brexit – about where euro-clearing should take place.

EU politicians want to see Brussels and the European Central Bank police these transactions more closely to safeguard financial stability across the eurozone.

Under the Commission’s proposals, the Paris-based European Securities and Markets Authority would be given new powers to decide whether euro-clearing houses outside the EU are “systemically important”. This would be determined by their size, activity, links to EU markets and the potential impact on financial markets, financial institutions or financial stability if they were to fail.
"The people who end up paying the price on the EU side are customers and clients" The London Stock Exchange’s LCH Group, the UK’s largest clearing house, would almost certainly fall within this category. Under the new rules, it would only be allowed to continue clearing euro-denominated transactions “if it establishes itself within the EU,” write Chan and Burton.

“Non-systemically important CCPs [central counterparties] will continue to be able to operate under the existing regulatory framework,” the Commission’s proposal states.

The Telegraph article
Illogical moveHowever, Miles Celic, chief executive of lobby group TheCityUK, told The Scotsman’s Ravender Semby that forcing London’s multibillion euro-clearing market to relocate to the eurozone after Brexit doesn’t make sense.

“If you turn around and say you can no longer have euro-clearing in the UK, how can you logically allow New York, Hong Kong, Shanghai and Singapore to have it?”

Celic told Semby that nobody had come to TheCityUK to say the EC’s plans were a good idea. He described the proposals as “economically inefficient” and “purely political”.

“It looks like a punishment to the UK and as with any punishment, it comes with a price to pay for the punisher,” he told Semby. “The people who end up paying the price on the EU side are customers and clients.”

The Scotsman article
Increased costsCelic was not the only one to suggest customers and clients would end up with the bill. Business Insider featured a Reuters report on comments from the International Swaps and Derivatives Association (ISDA). The industry body said moving the clearing of euro-denominated derivatives from London to the eurozone would require banks to set aside far more cash to insure trades against defaults – a cost that would be passed on to companies. 

The ISDA warned that the move “would split liquidity in markets and reduce the ability of banks to save on margin by offsetting positions in the same liquidity pool”, according to Reuters’ Huw Jones. This would require banks to set aside an additional 15%–20% in initial margin or cash to guard against a default. 

The Futures Industry Association reckons a relocation would nearly double the amount of margin needed to $160bn from the current $83bn. But Frankfurt-based Eurex Clearing, a likely beneficiary of the Commission’s plans, predicted that additional margin costs would be far lower in practice.

Scott O’Malia, ISDA’s chief executive, said many of the detrimental consequences of the  Commission’s plans would be felt most keenly by banks’ clients and far from guaranteeing financial stability, they were likely to “heighten financial stability concerns”. 

He called on the Commission to focus, instead, on appropriate arrangements for oversight of and co-operation with UK clearing houses. 

With the Commission’s plans attracting opposition from across the board this side of the English Channel, it looks like that “heated battle” between Brussels and the City is set to continue for some time yet. 

Business Insider/Reuters article
Seen a blog, news story or discussion online that you think might interest CISI members? Email rosalie.starling@wardour.co.uk.
Published: 16 Jun 2017
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