The European markets watchdog is working on a “Plan B” that would move clearing of euro-denominated derivatives out of London if the bloc decides not to grant the UK long-term access to its markets.
The London Stock Exchange’s LCH unit has been given permission by the bloc to continue clearing derivatives for EU customers for 18 months after the post-Brexit transition period ends on 31 December.
ICE and the London Metal Exchange have been granted similar temporary equivalence permissions until mid-2022.
LCH currently clears the vast majority of euro-denominated swaps — an activity central to London’s position as a global financial hub, and something the EU has wanted to occur within the bloc for a long time.
Banks have been reluctant shift their clearing operations away from London due to added costs and complexities, but the EU said that lenders operating in the bloc should use the 18 months of temporary equivalence to cut their “excessive reliance” on London’s clearing houses.
Whether the clearing houses in the UK are granted long-term access to EU markets will partially depend on good relations between the bloc’s regulator, the European Securities and Markets Authority, and the Bank of England, ESMA said.
“Equivalence assumes good cooperation and we work very well with the Bank of England, but as a fallback plan it’s important to assess if there could be an argument to relocate those activities to the EU,” said ESMA chair Steven Maijoor.
ESMA will assess how a “credible plan” for relocating euro clearing could look and work, Maijoor told Reuters.
“Plan A is to support global capital markets and have equivalence, but you need to have a Plan B and need to invoke the Plan B if a clearing house is so systemically relevant… or if cooperation is not working as expected,” he continued.
Maijoor said ESMA would soon issue a policy statement on where EU investors are obliged to trade shares listed in the bloc.
“What I expect that we come up with is very much in line with previous publications on this matter,” he said. The regulator has previously said that in general shares of EU-listed firms should be traded inside the bloc.