Euro clearing debate rages on as US regulator warns EU to take care with relocation decision

William Turvill
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The European Commission is considering relocation policy for the euro clearing market, which is currently dominated by London (Source: Getty)

Further warning shots were fired today over the risks of the European Union attempting to force euro clearing away from London.

Christopher Giancarlo, the acting chairman of US derivatives regulator Commodity Futures Trading Commission (CFTC), described it as an “important regulatory policy decision that needs to be made with care by European officials”.

He noted that the US “has not deemed a body of water – even as large as the Atlantic Ocean – as an impediment to effective [clearing house] supervision and examination”.

Read more: This is what Emmanuel Macron means for Brexit, the City and euro clearing

The European Commission confirmed last week it was considering either enhancing supervisory powers over third-country clearing houses, or central counterparties (CCPs), or asking those with “key systemic importance” to relocate to within the EU. An equivalence regime could also be an option.

London currently dominates the market for clearing of euro-denominated derivatives, making up 75 per cent of the business.

Speaking at an Isda conference on Wednesday, Giancarlo said:

I do not presume to tell those in Europe what they should do or what should be the outcome of important discussions between representatives on both sides of the channel.

I do not envy the choice that European officials will have to make between the perceived additional benefits of relocation to facilitate central bank support against the higher costs to the European financial system associated with loss of netting of euro-denominated risk exposures.

He added: “Given the closeness of the US and European derivatives markets, what Europe chooses to do on the supervision of CCPs undoubtedly will inform the evolution of US regulatory policy for cross-border swaps clearing.”

Last month, the CFTC’s commissioner, Sharon Bowen, warned the EU against making a relocation move on clearing.

She said: “[W]e consider that it is not for regulators to determine where business should take place, this is a global markets.

"We believe that this view is essential as it encourages innovation in our economy.”

Read more: EU confirms it could make a grab for London's euro clearing crown

Trade body Isda’s chief executive Scott O’Malia also warned of the “massive implications” a policy change could have today.

“There’s been lots of noise recently about the possibility of Europe introducing a location requirement for euro-denominated derivatives,” he said.

“This could have massive implications for efficient cross-border flows. Breaking up netting sets by requiring certain currencies to be cleared in specific locations reduces the potential for risk-exposure offsets, which increases costs, risk and operational complexity for derivatives users.”

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