Brussels is to set the scene for a European grab on London’s treasured euro clearing market, by giving its financial regulators more power.
The City is bracing itself for the European Commission’s proposed changes to the European Market Infrastructure Regulation (Emir), due out on Tuesday morning.
Brussels sources told City A.M. the proposals will include a mechanism giving the EU power to force relocation of euro clearing activity, which is currently dominated by London.
A source familiar with the plans told City A.M.: “The commission is not going for the nuclear option.”
The “nuclear option” would have seen the commission require all clearing of euro-denominated derivatives to take place within the EU.
While the proposed changes to Emir will stop short of this, they will leave the door open for a much-feared uprooting of the market.
The plans will include giving more power to Paris-based EU body the European Securities and Markets Authority (Esma) to oversee the euro clearing market. Along with central banks, Esma will decide how significant clearing houses are to the financial system. The commission will then make decisions on whether to try and force relocation of clearing activities.
The proposals will alarm many in the City, with various high-profile figures warning against clearing relocation plans in recent months. The London Stock Exchange Group, whose clearing house LCH could be targeted, has been particularly vocal.
LSE chief executive Xavier Rolet warned yesterday that forced relocation would create a “rump, illiquid, and systematically more dangerous” euro clearing market within the EU, though he added that his firm was “well positioned to react and to take advantage of opportunities”.
While the LSE could suffer as a result of the new rules, Deutsche Boerse – whose mega-merger with the LSE broke down earlier this year – stands to benefit through its clearing division, Eurex.
Deutsche Boerse will turn on the LSE on Tuesday as it publishes a paper calling into question claims around the damage that might be caused by clearing house relocation. The LSE, for instance, has referenced research from ClarusFT claiming forced relocation could cost banks $77bn in additional collateral. Deutsche Boerse puts the figure at between $3bn and $9bn.
City of London MP Mark Field told City A.M. that the new EU proposals, published today, were of “vital importance to the City” and that the UK reaction to them could mark an important moment for Brexit.
Speaking ahead of the proposals, Gary Campkin, director of policy and strategy at TheCityUK, said:
Clearing is a core part of the infrastructure that makes London the leading global financial centre. It happens here because that is the most efficient and effective way to service customers in Europe and the wider world.
Proposals which amount to a forced relocation of euro clearing would be disappointing. If pursued, this would likely lead to disruption, uncertainty and market fragmentation. This would impact people and businesses across the globe.
A City of London Corporation spokesperson said:
It’s incredibly important that politics doesn’t overshadow the business argument for keeping clearing in the UK.
The priority should be that clearing houses can continue to function without posing risks to financial stability and for activity to take place where it can do so most efficiently for the benefit of end-users.