EU’S euro clearing move an omen of Brexit swordplay to come

Comment Martin Flanagan

It is esoteric, but it shows the Brexit gloves are off. The EU has revealed that it is looking at regulatory reforms that could see London stripped of much of the lucrative euro-denominated derivatives clearing market following Brexit. It could be the first blood to be drawn as London and the EU haggle over financial services clout and reach in a postbrexit world.

The European Commission’s proposals would allow business as usual for clearing houses judged not systemically important. But it would impose stricter supervision of clearing houses deemed systemically important by EU central banks and the European Securities and Markets Authority (ESMA). This could include on-site inspections and extra cash buffers. But if a clearing house is judged in the top rank of systemic importance, the EC has indicated that some of its operations may have to relocate within EU borders.

That segment of the reforms could affect operations like the London Stock Exchange’s London Clearing House (LCH). It could also significantly damage London as the pre-eminent European financial centre as it currently processes threequarters of this trade, providing thousands of jobs.

The European authorities have a regulatory point. There is concern in the single market which we are set to leave that the UK should still have a such an important role in euro derivatives when it will no longer be covered by EU rules.

But you can see why Thecityuk, the trade body for the UK’S financial services industry, and the City of London Corporation are spitting feathers.

Switching clearing domiciles to the EU is likely to push up costs for European savers and businesses, and lead to clearing market fragmentation.

The UK accounts for 40 per cent of global clearing – acting as the middleman in transactions between trading parties. In contrast, the remaining EU27 member states account for less than 10 per cent.

It is arguable that the EU is simply not equipped to handle the volume of clearing that the UK does. In addition, London is renowned – or infamous – for gold-plated regulatory rules as well as clearing expertise and the advantage of the international language of business. The EC’S move move looks doctrinaire, if not slightly vengeful.