EU to throw London lifeline with extension to coveted clearing

Clearing is a critical foundation for financial markets, ensuring that trillions of pounds in swap trades are safely completed. [ckilger / Flickr]

The European Union is expected to throw the City of London an 18-month lifeline to continue clearing euro derivatives after Britain’s unfettered access to the bloc ends in January, industry sources said on Tuesday (15 September).

Britain left the EU in January and continued access under transition arrangements ends on Dec. 31, meaning EU banks would not be allowed to use clearing houses such as the London Stock Exchange’s LCH and ICE Clear Europe in 2021.

Clearing is a critical foundation for financial markets, ensuring that trillions of pounds in swap trades are safely completed.

Although a low margin business, London’s clearing houses help cement its status as the world’s biggest centre for trading derivatives, adding to its attractiveness as a base for global banks.

Brexit has already prompted banks to shift hundreds of jobs to their EU hubs, and lobby groups have warned that more roles could leave the British capital if euro clearing shifts to the euro zone.

LCH clears the bulk of euro-denominated interest rate swaps that are used by companies across the EU to insure themselves against adverse moves in borrowing costs.

But the location of euro derivatives clearing in London has long been a point of tension between Britain, which is keen to maintain the City’s pre-eminent role in global finance, and the EU, where policymakers want euro zone activity under the eye of the European Central Bank.

Global banks urge EU to 'improve' market access as Brexit looms

International banks have called on the European Union to make its system for financial market access more transparent and predictable to avoid hurting markets and consumers.

The EU has acknowledged that a sudden cut-off in access could undermine financial stability as users sought to shift large derivatives positions at short notice, giving it little choice but to grant what it has dubbed “time limited” access.

Industry sources said they expected the bloc’s executive European Commission to offer Britain an 18-month extension in euro clearing from January, subject to confirmation following a consultation with EU states launched on Monday.

“This is going to be good news,” one industry source said after market concerns that a shorter period was on the cards.

A European Commission official had told derivatives industry officials last Friday that a decision to grant access would be delayed from this week to later in the month due to Brussels’ concern over UK moves to partly breach its Brexit divorce settlement.

Granting only temporary access is aimed at putting pressure on banks in the EU to shift positions from London’s financial hub and to give more time for euro zone-based clearers such as Deutsche Boerse’s Eurex to build up capacity and market share in an orderly way.

The European Commission had no comment.

Paris aims to become Europe's top financial hub in post-Brexit world

London is currently Europe’s leading financial centre but the French authorities dream of seeing Paris in the lead. However, it remains to be seen if the City will lose access to European markets after the UK-EU negotiations this year. EURACTIV’s partner EUROEFE reports.

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