EU Outlines Plans To Grab UK's Euro Securities Clearing

Clearing houses are a key part of the financial system's plumbing, with trillions of euros being handled every year, mostly out of London.

The European Central Bank (ECB) and euro zone policymakers have long wanted control over euro clearing, saying it is core to the single currency area's financial stability and would be outside the EU's regulatory sphere once Britain leaves in 2019.

But the European Commission also confirms that "in specific circumstances" and "as a last resort" it retains the right to insist on the relocation of euro clearing with the ultimate decision taken with "the agreement of relevant central bank".

Under the Commission's proposals, the Paris-based European Securities and Markets Authority (ESMA), which oversees the regulation of credit rating agencies, would be given powers to determine whether euro clearing houses outside the EU were "systemically important".

In 2016 the United Kingdom cleared $1.18 trillion of interest rate derivatives every day, making it the second-largest clearing location in the world after the US, according to the Bank for International Settlements.

Last week another industry body, the Futures Industry Association, said relocation would almost double the amount of margin that would be needed, to $160 billion from $83 billion now.

"As we face the departure of the largest European Union financial center, we need to make certain adjustments to our rules to ensure that our efforts remain on track".

TheCityUK, a lobby group, has warned the move would cause uncertainty, higher costs of doing business and fragmentation in the market.

The European Commission decided not to include any quantitative criteria for "systemic" clearing houses, such as caps on clearing volumes, relying on a "case-by-case" approach by ESMA.

"The issue is whether and to what extent the EU wishes to prevent EU banks from clearing euro trades outside the EU", Gleeson said.

The rules still need to be debated and approved by EU states and members of the European parliament.

Euro clearing is essential to the flow of money around the world: clearing houses act as an intermediary between two sides of a trade conducted in euros, such as derivatives contracts created to shield businesses from sudden shifts in interest rates or currencies.

"The Commission has lost its courage when it comes to euro clearing".

The International Swaps and Derivatives Association (ISDA), one of the world's top derivatives industry bodies, also said on Monday that "relocation" would reduce the ability of banks to save on margin, or cash set aside in case of defaults, by offsetting positions in the same liquidity pool.

The proposal from the European Commission says that allowing the clearing houses to be based outside the EU could pose a risk to the continent's financial system.

  • Zachary Reyes