EU agrees new rules to move euro derivatives clearing from London
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[February 07, 2024] By
Huw Jones
LONDON (Reuters) -The European Union said on Wednesday that its
provisional deal to end the bloc's heavy reliance on a post-Brexit
London for clearing euro derivatives will help deepen mainland Europe's
capital market.
The bulk of clearing in euro-denominated interest rate swaps (IRS),
widely used by companies to hedge against unexpected moves in borrowing
costs, is done by the London Stock Exchange Group.
U.S. exchange operator ICE in London clears large amounts of Euribor
futures.
Clearing ensures that a stock, bond or derivatives trade is completed,
even if one side of the transaction goes bust, and helps build liquidity
in trading in a certain location.
Brussels wants EU regulators to have direct oversight of euro clearing
for banks and asset managers based in the bloc, particularly since
Britain's 2020 departure from the EU and requirement to comply with its
financial rules.
"This will bring more clearing services to Europe and enhance our
strategic autonomy," Vincent Van Peteghem, finance minister for current
EU president Belgium, which helped to negotiate the agreement with the
European Parliament, said in a statement.
U.S. Nasdaq, Deutsche Boerse and Swiss SIX Group's Madrid Exchange are
already stepping up efforts to attract business from London.
Markus Ferber, a German centre-right member of the parliament, was
critical of the deal, saying the new rules amount to a "tiny step"
because they include "preconditions, exemptions and review clauses".
"The big winner of last night's agreement is the City of London that
benefits from the status quo. In particular, the French government has
once again not taken a European perspective, but has done the bidding of
large U.S. investment banks," Ferber said.
Shifting significant volumes from London to mainland Europe could take
several years given the huge positions involved, and some business has
already gone to the United States.
LSEG's notional outstanding in euro IRS totalled 145.3 trillion euros on
Tuesday, though only a minority of this was transacted between EU
counterparties. Deutsche Boerse's Eurex Clearing had a total of 14
trillion euros at the end of December.
SOLID ACTIVE ACCOUNT
The deal sets a "solid active account requirement", meaning banks and
asset managers in the bloc must have an account with an EU-based
clearing house to clear contracts such as euro interest rate swaps, the
EU statement said.
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European Union flags flutter outside the EU Commission headquarters
in Brussels, Belgium, July 14, 2021. REUTERS/Yves Herman/File Photo
There were requirements to demonstrate that the accounts are
actually being used, including for "counterparties above a certain
threshold to clear trades in the most relevant sub-categories of
derivatives of substantial systemic importance".
Banks and asset managers in the bloc should regularly clear "at
least five trades" in each of the targeted categories of
derivatives, the statement said.
"Furthermore, a Joint Monitoring Mechanism is created to keep track
of this new requirement."
The European Commission is required to take further measures in two
years' time if heavy reliance on London has not been reduced, EU
lawmakers said in a separate statement.
International banks have criticised the EU law, saying that being
cut off from global pools of multi-currency liquidity at LSEG in
London could damage their international competitiveness.
LSEG said EU customers continue to share concerns about the
requirement to open operational accounts at an EU clearing house.
"We call for proportionality in the implementation of these
requirements in order to ensure that EU firms are not negatively
impacted," LSEG said in a statement.
ICE had no immediate comment.
At the time of Brexit four years ago, UK-based clearing houses were
given EU permission to continue serving customers in the bloc until
June 2025. This raised pressure on market participants to shift
clearing from London to centres such as Frankfurt, Madrid and
Stockholm.
The new rules will come into effect after EU states and full
European Parliament have given formal approval to the deal.
($1 = 0.9289 euros)
(Reporting by Huw Jones; Editing by Andrew Heavens, Alexander Smith
and Mark Heinrich)
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