LONDON, May 4 (IFR) - The European Commission plans to issue new rules that could force clearing of euro-denominated derivatives away from London once the UK exits the European Union in 2019.
Alongside its review of European Market Infrastructure Regulation published today, the commission confirmed its intention to publish additional legislative proposals that would ensure continued EU supervision of euro clearing following Brexit. The proposal is expected in June and will follow an impact assessment.
“Following the foreseen withdrawal of the United Kingdom from the EU, a substantial volume of transactions denominated in euro would cease to be cleared in the EU and would no longer be subject to EMIR and the EU supervisory architecture,” the commission said in a communication on legislative proposals still being prepared.
As much as 75% of euro-denominated interest rate derivatives are cleared in the UK, the commission said. Most of that activity is cleared by LCH’s London-based SwapClear, which has more than €85trn notional outstanding in euro interest rate swaps.
The commission said that where CCPs play a key systemic role for EU financial markets, they must be subject to the EU legal framework, including enhanced supervision and location requirements.
“These transactions directly impact the responsibilities, including in the area of monetary policy, of the relevant EU and Member State institutions and authorities,” said the commission.
Even in the event of a forced shift, market participants believe that there will be no quick fix in moving tens of trillions of euros in cleared euro derivatives to a new location.
“Should these proposed controls on London’s clearing status come to fruition, it is hard to envisage a speedy and cost efficient rerouting of clearing business, especially if a transitional deal is not reached,” said Fraser Bell, CRO at market infrastructure provider BSO.
“Unless extended time is factored in to gradually phase out clearing operations beyond the two-year Lisbon Treaty timetable, there is an uphill task to replicate the reliable and sophisticated infrastructure currently underpinning London’s clearing houses.”
The proposals could face significant hurdles, not least because the UK, as an EU member state for the next two years, will be able to lobby against the proposed legislation. Market participants are also concerned that liquidity at eurozone clearing houses is much lower than at LCH.
“A large-scale transfer of euro-clearing operations from London to the eurozone could reduce access to capital for European firms,” said analysts at independent derivatives broker XFA Global in note. “Rather than Frankfurt or Paris, New York might emerge as the real winner given the importance of scale in clearing.”
They also said that as a reserve currency, euro assets are widely traded around the world, with clearing operations emerging in the US and Switzerland, while sterling assets are cleared in Frankfurt.
Responding to the EC’s comments, a spokesperson at LSEG, LCH’s parent, said that the firm would continue its engagement with European authorities “to highlight the benefits of an open, efficient and systemically safe clearing environment, which benefits the wider European economy and supports the euro’s appeal and relevance as part of the global economy.”
“We will also continue to highlight the case for continued global regulatory equivalence and cooperation, which are required to preserve the current substantial economic efficiencies for customers and support financial stability across the market as a whole.” (Reporting by Helen Bartholomew)