UK gets allies in its bid to continue clearing euro derivatives

The UK has gained potential allies in its bid to hold on to the business of clearing eurodenominated derivatives after Brexit takes effect.

Sweden said an EU proposal to allow authorities to force the biggest foreign derivatives clearing firms to set up shop in the bloc could prove excessive, according to a September 4 paper that summarises the positions of 10 governments. Spain highlighted the “considerable costs” a location policy would entail, and Ireland warned it could leave firms running to find clearing alternatives.

France continued to lead the charge for greater EU control over clearing of euro derivatives, a position staked out by former president Francois Hollande shortly after the Brexit referendum in June 2016.

The UK renewed its opposition to the plan, saying it would “increase costs and undermine stability by fragmenting markets and reducing their efficiency”.

The clearing of euro-denominated derivatives had already become a Brexit flash point when the European Commission, the EU’s executive, laid out its proposal in June. Under the plan, smaller firms would carry on operating under existing rules, while those deemed systemically important would face stricter scrutiny and, ultimately, could be forced to move clearing of derivatives denominated in EU currencies inside the bloc.

Clearing houses stand between the two sides of a derivative wager and hold collateral, known as margin, from both in case a member defaults. About 75% of trading in eurodenominated interest rate swaps takes place in the UK, according to Bank for International Settlements data.

Sweden said the effect assessment of a location policy was insufficient, according to the document prepared by the Council of the EU and seen by Bloomberg.

“Costs of fragmentation due to potential relocation requirements will most probably be passed on to end-users of clearing services in the real economy, which would be unfortunate,” the document states.

Sweden also questioned the motives behind the “strengthened role” for central banks foreseen in the proposal. The European Central Bank has mounted an aggressive campaign for control of euro clearing, a business dominated by London Stock Exchange Group, majority owner of the world’s largest clearing house, LCH.

The French renewed their advocacy of tough controls, arguing that the commission and the European Securities and Markets Authority should be given the “ability to impose additional requirements” on clearing houses “in order to have a say (up to a veto right if needed) on some decisions taken by thirdcountry authorities”.

France and Germany said the commission’s proposal should be tweaked to allow for more granularity when assessing the importance of a clearing house.

A denial to grant a thirdcountry firm access to the EU market “should include the possibility to limit the refusal to certain categories of financial instruments” like euro-denominated interest rate swaps, Germany said.