Bank of England governor Andrew Bailey has warned that the EU will likely try to snatch away trillions of pounds of derivatives clearing from London’s major clearing houses in a series of moves that could threaten financial stability.
Bailey told MPs today that Brussels was looking to implement “location policy” and could force banks to move clearing activity to Europe through legislation that would be a “serious escalation” of UK -EU tensions.
The UK’s derivative clearing houses, such as the powerhouse London Clearing House, were given permission to continue to operate in the EU on a temporary basis until June 2022 in order to secure financial stability post-Brexit.
This was one of just two areas, out of of 40, that the EU granted the UK equivalence for post-Brexit.
London Clearing House has more than £80 trillion of outstanding Euro clearing and that is just a quarter of total activity at the clearing house
Bailey said that if the EU does not extend clearing house equivalence beyond June 2022 then about 25 per cent of Euro derivative clearing to the EU would be forced to move.
He said the other 75 per cent would likely stay in London as it is being done by non-EU institutions.
However, the Bank of England governor warned that Brussels would likely seek legislative routes to force financial institutions to use EU-based clearing houses instead in a move that would have “dubious legality”.
“To get the other 75 percent would require something controversial, such as an attempt of territorial legislation or an attempt to cajole dealers and banks to say there will be a penalty unless you move this activity into the Euro area,” he said.
“That seems to be where the debate is heading – I’m not surprised by this.
“I have to say to you that it would be highly controversial and something we would have to, and want to, resist very firmly.”
When asked by Treasury Select Committee chair Mel Stride if these moves would affect financial stability, Bailey said: “It’s certainly something we would be concerned about as the financial stability authority.
“Clearing has come far more into the foreground as a financial stability tool since the financial crisis – a lot more instruments, particularly derivative instruments, are cleared now than before the crisis.
“Any erosion of the stability of the clearing system, and it is a global system, really would be a concern.”
Clearing houses act as an official go-between for buyers and sellers of derivatives contracts.
Their presence is supposed to ensure that buyers and sellers honour their contracts, while also ensuring financial stability.
The European Commission declined to comment.