Tuesday

15th Oct 2019

UK clearing houses could be moved to EU

  • Some London-based clearing houses could be, as a measure of "last resort" be forced to move to the EU, the commission proposed (Photo: Rob Bye)

The European Commission has proposed the EU should be able to force important clearing houses to be based in its territory.

The new rules, if adopted, could affect clearing houses in London after the United Kingdom leaves the EU. Ultimately, some London-based clearing houses could be forced to set up shop in the EU.

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Clearing houses, also known as central counterparties (CCPs), became more important after the 2008 financial crisis. They act as an intermediary between traders of financial products - such as currencies, interest rate derivatives, and credit default swaps.

The idea is that CCPs reduce the risk of insolvency. They are subject to EU rules already, but the commission, on Tuesday (13 June), also proposed to increase its supervision of CCPs, given their increased importance.

“CCPs were quite niche, but they have grown enormously,” said an EU official, who spoke on condition of anonymity.

There are currently 17 such clearing houses in the EU, with most of them focusing on a specific type of financial product.

The new rules proposed on Tuesday would make a distinction between clearing houses that posed no systemic risk to the EU's financial markets, those that are “systemically important” to the EU, and those that are “substantially systemically important”.

“The more important for the EU a CCP is, the more intense the supervision will be,” said the EU official.

It is not yet known which clearing houses would fall into which category, because that will be determined later.

The proposal, part of the EU's Capital Markets Union strategy, would grant a bigger role to the European Securities and Markets Authority (ESMA), an EU agency based in Paris.

The “substantially systemically important” clearing houses would be subject to more stringent controls by ESMA.

If such a clearing house was in a non-EU country, but “substantially systemically important” to the EU, it would have to accept a certain degree of supervision from ESMA.

If ESMA was unable to carry out that supervision satisfactorily, the EU commission could propose to member states that they demand the clearing house to be established in the EU. A majority of national governments would then have to agree.

This requirement, which the EU official said was a measure of “last resort”, was particularly relevant in the context of Brexit.

Some of the most important clearing houses are based in the UK, and around three quarters of clearing operations in euros currently take place in the City of London.

The EU official said the commission was already working on the new rules before the UK had decided to leave the EU, but that Brexit became "an additional factor".

EU financial services commissioner Valdis Dombrovskis mentioned Brexit in a press release on Tuesday.

“The continued safety and stability of our financial system remains a key priority,” he said.

“As we face the departure of the largest EU financial centre, we need to make certain adjustments to our rules to ensure that our efforts remain on track,” he added, referring to London.

The proposal will need to be approved by the European Parliament and national governments.

A second EU official said he had no indication that the UK would try to block the process, nor did he have an estimate of how often the “last resort” measure - forcing a clearing house to set up an EU office - might occur.

“The framework needs to cover all the eventualities,” the first official added.

The second contact noted that the requirement for being established in the EU could not be fulfilled by having a “letterbox” entity in the European Union.

“You have to have a business here, substantial activity,” he said.

The proposal would mean that the ESMA agency would need an additional 50 members of staff. It currently has around 200.

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