Monday 21 September 2020 2:37 pm

EU gives banks until 2022 to cut ‘excessive’ use of London clearing

The European Union’s banks have until mid-2022 to reduce their “excessive exposures” to London’s derivatives clearing houses, the European Commission has said.

The bloc’s new finance chief Valdis Dombrovskis said he had approved a proposal to let EU banks and market participants access Britain’s clearing systems for 18 months after the Brexit transition finishes at the end of December.

Read more: London’s grip on clearing continues as Frankfurt’s progress slows

Clearing is the procedure by which financial deals are settled. It is vital to ensuring the correct payments reach the right parties, even if a counterparty goes bust.

London completely dominates the European clearing business. Most trades in interest rate, commodity and credit derivatives come through systems in the capital. 

However, there had been fears in the City of London and European financial centres that the lack of progress in Brexit talks might mean EU financial firms would have to rapidly exit UK clearing houses.

The European Commission, the EU’s executive arm, today said it had “adopted a time-limited decision to give financial market participants 18 months to reduce their exposure to UK central counterparties (CCPs)”.

Dombrovskis said today’s decision “gives EU market participants the time they need to reduce their excessive exposures to UK-based CCPs [central counterparties], and EU CCPs the time to build up their clearing capability”.

London’s clearing dominance ‘poses risks’

The Commission said: “The heavy reliance of the EU financial system on services provided by UK-based CCPs raises important issues related to financial stability.”

The Bank of England welcomed the Commission’s move. It called it an “important step to mitigate financial stability risks around the end of the year”.

“The decision will avoid EU financial firms having to exit UK clearing houses before the end of the year. This would have led to the transfer and replacement of a very large number of contracts in a short period.”

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However, the relationship between the two sides remains at one of its lowest points since the 2016 referendum. This is causing anxiety for many in the City who fear a no-deal Brexit could be bad for business.

Earlier this month, the City of London’s policy chief Catherine McGuinness said the government appeared to have forgotten about the financial services sector during Brexit talks.