Monday 28 September 2020 10:37 am

Britain and EU reach temporary agreement on derivatives clearing

Britain and the EU have reached a temporary accord on the information-sharing arrangements needed for eurozone banks to continue to use London’s clearing houses until June 2022. 

Britain’s unfettered access to the bloc’s markets ends on 31 December. Brussels had already agreed to grant UK clearing houses temporary access for 18 months, but an updated regulatory agreement between the Bank of England and European markets watchdog was needed to implement the decision. 

Read more: EU to maintain access to City of London clearing houses after Brexit

The European Securities and Markets Authority (ESMA) said the temporary access arrangement would apply to three clearing houses in Britain: the London Stock Exchange’s LCH, ICE Clear Europe, and LME Clear.

It has classified ICE Clearing and LCH as being “systemically important”, meaning they will face close scrutiny from the EU, particularly during any market crisis.

LCH clears the bulk of euro-denominated interest rate swaps — a derivatives contract that helps companies shield themselves against unexpected moves in borrowing costs.

Brussels has said that banks operating in the EU should use the 18 months to cut their “excessive reliance” on London’s clearing houses.

ESMA said it will conduct a review into the systemic importance of each UK clearing house during this period, and will take any “appropriate measures” to address financial stability risks.

Such measures could include deciding that a foreign clearing house or some of its services are of such substantial systemic importance that it should not be allowed to serve EU customers, the regulator said.

The news comes as EU governments move to address the risk that shares in European firms could be unable to trade in London once the transition period ends, posing a threat to EU stocks with dual listings in the City.

EU diplomats are set to meet today to try and find a way around the rules governing dual-listed firms, the Financial Times reported. 

Prominent companies with dual listings in the UK and on EU exchanges include BA-owner International Airlines Group and the Bank of Ireland. 

Central to the issue is the EU’s so-called “share trading obligation” (STA), which limits the rights of investors in the bloc to trade shares on non-EU exchanges after the shares have been admitted to trading on an exchange within the bloc. 

Read more: Brexit: City faces wait beyond 2020 for EU financial market access

The FT reported that a leaked diplomatic note from Germany, in its capacity as current EU President, confirms that some countries within the bloc want to explore a regulatory solution to the STA issue now. 

However the European Commission views the issue of the post-Brexit relationship between the EU and the City as a key source of leverage in the ongoing EU-UK negotiations, and is urging governments to wait for a planned review of EU trading rules scheduled for next year, the paper reported.