The European Commission has confirmed it is weighing up making a grab for London’s treasured euro clearing market.
Vice president Valdis Dombrovskis said the body is considering either enhancing supervisory powers over third-country clearing houses or asking those with “key systemic importance” to relocate into the European Union. He suggested an equivalence regime could also be an option.
In response to the news, chancellor Philip Hammond hit back, warning the EU against proposals that would “disrupt growth, raise the cost of investment in Europe and the UK or weaken financial stability”.
He said in a statement:
We approach the Brexit negotiations with a spirit of goodwill and we will consider any EU proposal before we leave on its merits. But we should be careful of any proposals which might disrupt growth, raise the cost of investment in Europe and the UK or weaken financial stability.
London is the world’s number one financial centre with high standards of financial supervision, including longstanding cooperation with EU institutions. This benefits the entire continent. We trust everyone in the negotiations will see the value in not undermining that.
London currently dominates the market for clearing of euro-denominated derivatives, making up 75 per cent of the business. A previous attempt by the European Central Bank (ECB) to force the market into the Eurozone failed in 2015. But the debate heated up once more after the UK voted for Brexit in June last year.
Noting that the UK “currently plays a key role in providing clearing services for Europe”, Dombrovskis said the European Commission will make proposals around the subject area next month following an “impact assessment” with stakeholders.
He revealed the commission is looking at different possibilities for third-party countries that play a “key systemic role” in euro clearing:
“We can ask for enhanced supervisory powers for EU authorities over the third country entities,” he told a press conference in Brussels on Thursday afternoon.
“Or such CCPs [central counterparties, or clearing houses] of key systemic importance for the EU could be asked to be located within the EU. So we now need to look at these options in the impact assessment.”
A commission document setting out proposed changes to European Market Infrastructure Regulation (EMIR), leaked earlier this week, today also confirmed relocation plans were on the table.
Specific arrangements based on objective criteria are necessary to ensure that that [sic] CCPs that play a key systemic role for EU financial markets are subject to the safeguards provided by the EU legal framework, including, where necessary, enhanced supervision at EU level and/or location requirements.
TheCityUK hit out at the proposals, saying a “forced relocation… is in no one’s interests”.
Chief executive Miles Celic said:
A forced re-location of euro-clearing would lead to disruption, uncertainty and fragmentation of the market. A potentially less liquid, and less competitive EU market would result in higher costs for European savers and investors. This would ultimately be detrimental to people and businesses in Britain and in Europe. This is in no one’s interest and is entirely avoidable.
Earlier this week, commenting on the leaked details of the proposals, the London Stock Exchange suggested the measures would harm those within the EU most.
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.
In an interview with City A.M. in February, Dombrovskis revealed he was looking into what Brexit meant for clearing along with the European Central Bank.
“There are several factors at play,” Dombrovskis says. “One is financial stability. There are questions related to the enforceability of swap lines between ECB and Bank of England if the UK is to move out of the jurisdiction of the European Court of Justice.
“And there is also a question of functioning of financial markets, basically of avoiding fragmentation of the financial markets. It’s a complex issue which we’ll need to assess.”