The EU faces increasing pressure from Europe’s largest derivatives firms to radically reconsider its plans to take euro-denominated clearance from London.
Since Brexit the EU has been determined to move the clearing of strategic European trades on the continent as quickly as possible.
The EU has announced that the latest deadline will be June 2025. Finance bosses, however, have warned that Brussels’ blueprint is a grave threat to the financial stability.
BNP Paribas and Deutsche Bank, as well as Societe Generale and BNP Paribas in Europe, have all vehemently opposed the EU plans. They fear extra costs and a less efficient clearing. London’s clearinghouse LCH has also called for a change of heart, since it stands to lose lucrative contracts.
In recent weeks, banks, LCH, and their lobby groups have intensified efforts to reverse the European Commission plans. They warn that Brussels’ proposals for bringing the activity to Europe are not feasible and could cause havoc on European markets.
“The City is involved at the highest level of government as it is an issue that is both a matter of financial stability for the EU/eurozone as well as an issue which is existential for the EU/eurozone,” said a person who was involved in the discussions, but asked to remain anonymous because the discussion were sensitive.
The International Swaps and Derivatives Association has been lobbying on the details of the EU plans to force certain euro-denominated transactions to be routed through EU clearinghouses by mid-2025.
ISDA stated that the proposals in their current form are so unworkable, they could “have an undesired result of discouraging market participants from clearing transaction” which would increase the risk on markets.
The European Banking Federation, a lobby group, has published a position document in recent weeks. It warns MEPs and EU members that the current plans for Europe “may have unanticipated and extensive adverse effects on competitiveness, resilience, and attractiveness of European Financial Markets and their Financial Institutions”.
The EU granted London temporary “equivalence”, in clearing, as a result of Brexit. This allows the clearing powerhouse of the City to continue managing euro-denominated swaps which stood at EUR133tn by Friday’s closing.
It is risky to extend equivalence any further. Mairead McGuinness, EU commissioner for financial services, has said that June 2025 will be the end date.
The plan was unveiled in December but serious doubts about its implementation have arisen. Concerns about financial stability are also high on the political agenda globally after the implosion and collapse of several US banks, including Credit Suisse.
The EU is not considering a delay and any changes will be made by the next Commission, which assumes office in late 2024.
The Commission said that its decision in February last year to extend equivalence of clearing houses for the UK “ensures short-term financial stability within the EU.” This decision is not being amended at this time.
Another person involved in industry discussions said that there is a contradiction between the political message and the reality. “We almost assume that the equivalence principle will be applied.”
EU officials have said that the extension may be a reward for the improved relationship between the two parties after the Windsor Framework, which was overseen by UK Prime Minister Rishi Sunak and settled the difficult issue of trade between Northern Ireland, the EU, and the UK after Brexit.
One EU official said, “If I was Rishi Sunak I would push very hard for it.” “There’s nothing concrete but the atmosphere is positive.”
British officials suspect that the EU may extend the date to 2025, but this is mainly because the financial services sector of the EU needs London and wants to avoid a massive disruption.
One British official said that it could be in the EU’s interest to claim it is doing the UK a favor. “But we haven’t had any discussions about this.”
LCH declined comment on specific talks, but said: “We continue to engage with and cooperate with the relevant regulatory agencies in relation to the long-term Recognition of LCH Limited.”
Deutsche Bank, BNP Paribas, and Societe Generale refused to comment.
McGuinness will visit London in the coming month to discuss a new Memorandum of Understanding on Financial Services, which is intended to create an open forum to settle differences between both sides.
Acuiti is a provider of derivatives market data. A research conducted by Acuiti on Thursday revealed that 8% of participants in the market supported the EU clearing plans, while the majority were concerned about the cost increase. It added that most wanted clarification from the EU about its plans.
William Mitting said that there needs to be more clarity, as clearing membership is not something you can achieve in a matter of months. There’s been a lot invested and the process is long.