EURO-clearing in the crosshairs

[Pelle Svanslös]

Brussels launched an attack on London’s role as Europe’s financial center.

A four-page European Commission “communication” released Thursday has
thrown into doubt whether the U.K. will be able to retain its almost €1
trillion euro-clearing business, threatening London’s status as the de
facto financial hub of the EU.

It appears to be the first shot fired in the financial services battle
following the U.K.’s Brexit vote, with the EU declaring war on euro
clearing.

Right now, London handles €927 billion worth of euro-denominated
transactions each day, and as much as 75 percent of euro-denominated
interest-rate derivatives are cleared at clearing houses in the U.K.
Clearing involves an entity standing in the middle of two parties to a
transaction, with the aim of managing the risk that arises if one party
cannot make required payments.

Although the U.K. is outside the eurozone, it is subject to the EU’s
landmark derivatives legislation, the European Market Infrastructure
Regulation (EMIR), and to EU supervision.

But after Brexit, that would all change, and the EU is not content to
sit back and watch its currency being traded in a non-member country and
without the ability to intervene in case of financial instability.

“The fact that euro clearing is currently taking place in London and
thereby outside of the eurozone is an anomaly that cannot be maintained
after Brexit,” said Markus Ferber, a German conservative MEP and vice
chair of the European Parliament’s economic and monetary affairs
committee. “On crucial issues of financial market stability, the EU must
not rely on the mere goodwill of third-country authorities.”

Brussels’ concerns are likely to lead to legislative action putting
forward two potential options for U.K. clearing houses. They can either
expect to submit themselves to more supervision from the EU, despite
having Brexited, or watch the multibillion industry relocate to another
place within the bloc.

Any move to limit euro clearing in the U.K. would be entirely a
political decision as a result of Brexit, but the topic itself is not new.

The European Central Bank attempted to take a pop at London a few years
ago, arguing in a location policy that any significant euro-clearing
business should be handled in the eurozone.

But in a 2015 ruling, following a U.K. complaint, the EU’s General Court
sided with the U.K. Instead of remarking on potential financial
stability concerns of euro clearing taking place outside the eurozone,
the court ruled the ECB had no authority over clearing in the EU.

Specifically, the court declared that the ECB “does not have the
competence necessary to regulate the activity of securities-clearing
systems.”

The Commission, by contrast, holds the pen on rules for clearing and
looks set to take full advantage of those powers. If so, it would be a
post-Brexit-vote move that’s as political as it can get in Europe’s
financial services arena.

EU regulators such as the European Securities and Markets Authority and
the ECB could reach an arrangement whereby they are granted enhanced
powers over clearing houses despite those firms being outside the area
of EU regulatory remit. The threat to remove clearing from the U.K.,
however, is sure to be a key item in the inevitable Brexit horse-trading
over the coming months.

For London, the loss would be devastating. Some estimate it would cost
the city £63 billion. The industry is the centerpiece of banking in the
City of London, and any clearing house departures could be followed by
large financial institutions and with it, tens of thousands of jobs.

http://www.politico.eu/article/eu-fires-opening-shot-to-end-londons-euro-business/