The European Central Bank was caught by surprise last night after learning that the UK government was taking legal action against the bank's rules for clearing houses, which may rule out non-eurozone countries from overseeing trades.
The UK will sue the European Central Banks (ECB) over rules that limit the operation of clearing houses to euro-area countries because it believes they contravene the basic principles of the Single Market, such as the free movement of capital and the freedom to establish cross-border business.
The City of London is the EU's biggest hub for financial clearing and could lose business according to the rules.
The UK's complaint relates to an ECB policy paper which states that any clearing houses with over 5% of market share in a euro-denominated currency should be located in the euro area.
With over 40% of the world's over-the-counter derivative trading based in London, the City fears its operations would have to move to Paris or Frankfurt.
Clearing houses have recently become a political issue as EU and US regulators decided to send all Over The Counter (OTC) Derivatives – products which rely on price fluctuations in underlying assets – through a clearing service first. The multi-trillion industry is believed to have exacerbated volatility in financial markets.
Latest Franco-British spat
A spokesperson for the ECB declined to comment but a source from London's City said the news had come very unexpectedly. The case smacks of similar Franco-British spats that have been dominating EU attempts to regulate the financial sector.
Late last year the two countries fought tooth and nail over whether the EU's new pan-European banking supervisor, the European Banking Authority (EBA), should be located in Paris or London. The UK won that argument, while a second regulator, the European Securities and Markets Authority (ESMA), was designated for Paris.
In 2009 a confidential memo from the French central bank revealed that the bank was lobbying for the establishment of a Paris-based clearing house for credit default swaps, a kind of derivative contract.
London is home to the largest clearing house in the world, LCH.Clearnet, which clears share trading on the London Stock Exchange and manages an over-the-counter (OTC) derivatives clearing service.
"The government wants to see this resolved swiftly and without involving the courts, but if necessary will not shy away from continuing legal action," said a spokesperson from the UK Treasury yesterday.