Britain will resist “very firmly” any European Union attempts to arm-twist banks into shifting trillions of euros in derivatives clearing from Britain to the bloc after Brexit, Bank of England governor Andrew Bailey said yesterday.
Europe’s top banks have been asked by the European Commission to justify why they should not have to shift clearing of euro-denominated derivatives from London to the EU, a document seen by Reuters on Tuesday showed.
Clearing is a core part of financial plumbing, ensuring that a stock or bond trade is completed, even if one side of the transaction goes bust.
Britain’s financial services industry, which contributes over 10% of UK taxes, has been largely cut off from the EU, hitherto its biggest export customer, since a Brexit transition period ended on December 31 as the sector is not covered by the UK-EU trade deal.
Trading in EU shares and derivatives has already left Britain for the continent.
The EU is now targeting clearing which is dominated by the London Stock Exchange’s LCH arm to reduce the bloc’s reliance on the City of London financial hub, over which EU rules and supervision no longer apply.
“It would be very controversial in my view, because legislating extra-territorially is controversial anyway and obviously of dubious legality, frankly,...” Bailey told lawmakers in Britain’s parliament yesterday.
Some 75% of the €83.5tn ($101tn) in clearing positions at LCH are not held by EU counterparties and the EU should not be targeting them, Bailey said.
“I have to say to you quite bluntly that that would be highly controversial and I have to say that that would be something that we would, I think, have to and want to resist very firmly,” he said.
Brussels has given LCH permission, known as equivalence, to continue clearing euro trades for EU firms until mid-2022, providing time for banks to shift positions from London to the bloc.
The question of equivalence is not about mandating what non-EU market participants must do outside the bloc and the latest efforts by Brussels were about forced relocation of financial activity, Bailey said.
Deutsche Boerse has been offering sweeteners to banks that shift positions from London to its Eurex clearing arm in Frankfurt, but has barely eroded LCH’s market share.
The volume of clearing represented by EU clients at LCH in London would not be very viable on its own inside the bloc as it would mean fragmenting a big pool of derivatives, Bailey said.
“By splitting that pool up the whole process becomes less efficient.
To break that down it would increase costs, no question about that,” he said.
Banks have said that by clearing all denominations of derivatives at LCH means they can net across different positions to save on margin, or cash they must post against potential default of trades.
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