New euro clearing plans due to be set out by Brussels could be an own goal for the EU, the London Stock Exchange has suggested.
The European Commission is expected to set out proposals under which UK operators would need to either relocate or be supervised by European authorities.
It will reveal legislative proposals in June and a draft document will be released tomorrow, according to the FT. The commission will set out how clearing houses must be “subject to safeguards provided by the EU legal framework… This includes, where necessary, direct supervision at EU level [and/or] location requirements”.
The LSE hit back at the plans yesterday, saying they would “damage only European issuers, savers, investors, pension funds and intermediaries”.
The firm said that it was “strongly positioned to adapt to any outcome from the debate around clearing OTC [over-the-counter] derivatives (e.g. swaps) in Europe”, with EU-originated euro swaps making up a small part of its business.
“It should be noted that any restriction on the clearing of euro swaps in the EU is likely to lead to the emergence of a restricted onshore market for the clearing of euro swaps in the EU,” the LSE said.
“The net effect would be the creation of an international offshore euro swaps liquidity pool for non-EU entities, and a parallel less liquid, smaller onshore euro swap market which would damage only European issuers, savers, investors, pension funds and intermediaries.”
The City reaction
Anthony Belchambers, chairman of the honorary advisory council of the FSNForum, said it was “perfectly logical” that the EU would want more oversight of clearing after the Brexit vote.
He also noted that the EU previously attempted to relocate all activity into the Eurozone. “At least there’s now an and/or approach here,” he said. “I rather take some encouragement from all this.”
London MEP Syed Kamall said: “[T]he question of future oversight from the EU will be a matter for the Brexit negotiations, but politicians should listen to the businesses that actually do the trading and ask where they want to be.”
Craig Pirrong, a finance professor at the University of Houston and clearing expert, said the proposals would “make the EU look like dirigiste opportunists, cloaking a grab for business and power in high-minded rhetoric about financial stability”.
City of London Corporation policy chairman Mark Boleat said:
Clearing fulfils a fundamental role for the financial services sector in both the UK and EU. The ecosystem that we have built here in the City, combined with the expertise and regulatory framework we have in the place, means this industry leads the way globally.
A grab for the clearing sector should not be an example where the politics supersedes the economics.
The priority should be that clearing houses can continue to function without posing risks to financial stability and for that activity to take place where it can do so most efficiently for the benefit of end-users.