The EU is coming under mounting pressure from Europe’s biggest derivatives houses to radically rethink its plans for wresting euro-denominated clearing from the City of London.
Clearing houses — which reduce market risk by standing between two parties in a trade — have been a key battleground since Brexit, with the EU intent on moving the clearing of strategically important European trades to the continent as soon as it is practical to do so.
The latest deadline, which the EU has vowed will be the final cut-off, is June 2025. But finance bosses have warned of the grave risk to financial stability which Brussels’ blueprint poses.
Europe’s biggest derivatives houses, including BNP Paribas, Deutsche Bank and Société Générale, vehemently oppose the EU’s plans, fearing extra costs and less efficient clearing, while London’s clearing house LCH, which stands to lose lucrative business, has also pushed for a rethink.
Banks, LCH and their lobby groups stepped up efforts to overturn the European Commission’s plans in recent weeks, warning that Brussels’ proposals to bring the activity onshore are not workable and could wreak havoc with European markets.
“Officials are involved at the highest levels on both sides as this is a financial stability issue for the EU/eurozone and it is also an existential issue for the City,” said one person involved in the talks, who asked not to be named as discussions were sensitive.
Lobbying led by the International Swaps and Derivatives Association is focused on the detail of the EU’s plans to force companies to route a yet-to-be determined percentage of certain euro-denominated trades through EU clearing houses from mid-2025.
ISDA said the proposals as they stood were so unworkable they could “have the undesired outcome of dissuading market participants from clearing transactions” which would increase risk in markets.
Lobby group the European Banking Federation has circulated a position paper in recent weeks, warning MEPs and EU member states that Europe’s current plans “may lead to unforeseen and extensively adverse effects on the competitiveness, resilience and attractiveness of European financial markets and their financial institutions”.
Clearing is the only area where the EU has granted London temporary “equivalence” in the aftermath of Brexit, allowing the City’s clearing powerhouse to continue handling euro denominated swaps trades that stood at €133tn as of Friday’s close.
Extending equivalence further is politically fraught. The EU’s financial services commissioner Mairead McGuinness has insisted June 2025 is the final cut off.
But serious doubts have emerged about the practicalities of implementing the plan, unveiled last December, and concerns about financial stability have shot up the global political agenda after the implosion of a clutch of US banks and the collapse of Credit Suisse.
People familiar with the EU’s position said Brussels was not entertaining an extension now and that any changes would fall to the next commission, which takes over in late 2024.
The commission said its decision last February to extend equivalence for UK clearing houses “ensures the EU’s financial stability in the short-term. There are currently no plans to amend this decision.”
“There is an inconsistency between the message at political level and the reality on the ground,” another person involved in the industry discussions told the Financial Times. “We almost take it as a given that equivalence will be extended.”
Some EU officials said the extension could be an early reward for improved relations between the two sides after the Windsor framework, overseen by UK prime minister Rishi Sunak, settled the thorny issue of trade between Northern Ireland and the EU after Brexit.
“If I were Rishi Sunak, I would be pushing very hard for this,” said one EU official. “There isn’t anything concrete, but the atmosphere is very positive.”
British officials also suspect the EU might extend the 2025 date, but primarily because the bloc’s financial services sector needs London and is anxious to avoid massive dislocation.
“There could be a lot of game-playing about who is the real winner in all of this,” said one British government official, arguing it might be in the EU’s interests to suggest it was doing the UK a favour. “But we have not held any discussions on this.”
LCH declined to comment on any specific talks but said: “We will continue to engage and co-operate with the relevant regulatory authorities in respect of the long-term recognition of LCH Limited on an ongoing basis.”
Deutsche Bank, BNP Paribas and Société Générale declined to comment.
McGuinness is expected to visit London this month and will discuss, among other things, a new memorandum of understanding on financial services, intended to create a talking shop to resolve differences between the two sides.
Research from Acuiti, a derivatives market information supplier, on Thursday found that 8 per cent of market participants supported the EU’s clearing plans and the majority worried it would raise their costs. Most wanted clarity from the EU on its plans, it added.
“There does need to be clarity as you can’t get clearing membership in a few months,” said William Mitting, chief executive of Acuiti. “There’s a lot of investment and it’s a long process.”
EU under pressure to extend access to London clearing houses
