Compensation: Brussels resigns itself to maintaining ties with London

Posted on Jan 18, 2022 at 6:47 PMUpdated on Jan 18, 2022 at 6:52 PM

Clearinghouses are not about to cross the Channel. On Tuesday, the European Commissioner for Financial Services, Mairead McGuinness, announced that the European executive intends to propose to renew for three years, from its expiry in June, the authorization granted to the banks of the monetary bloc to use the “clearing house” London.


“We are currently consulting Member States on this draft equivalence decision, which will take the form of an implementing act. We are considering proposing an extension of the equivalence decision for three years – until the end of June 2025,” said one of its spokespersons.

Europe has no choice but to buy time in this way. Since the results of the referendum on Brexit, Brussels has tried in vain to convince the banks of the Union to relocate these activities to the Old Continent. For certain transactions denominated in euros, clearing is carried out almost entirely at the City. Thus, LCH Ltd, the clearing house of the London Stock Exchange, handles more than 90% of interest rate hedging transactions (swaps) in euros.

Few alternatives

For European leaders and regulators, the stakes are high. Clearing houses play a central role for the financial markets. By interposing between a seller and a buyer, they secure financial transactions in the event that one of the parties does not respect its commitments. But if a clearing house fails to deal with a default itself, the consequences for the financial system can be disastrous.

The European market policeman – Esma – has identified London players, such as ICEClear or LCH Ltd, which are “of substantial systemic importance for the financial stability of the Union, and which pose risks”. Brussels would prefer to directly supervise these operations – which would be the case with a European chamber – in particular to ensure that the interests of the euro zone and the Union do not come after those of the United Kingdom.

The problem is that no alternative currently exists on the Old Continent. In Frankfurt, Deutsche Börse launched an offer, but it is struggling to take off. Banks prefer to use a single clearing house for their transactions in the different currencies, in particular to optimize the management of the guarantees that they must pledge for each transaction.

admission of failure

For London, it is a political and symbolic victory. The City demonstrates its ability to retain a central place in the European financial mechanism despite Brexit. Until now, Brussels had been content to grant six-month reprieves. This three-year period sounds like an admission of failure and raises questions about the possibility of bringing these transactions to fruition on the continent.

But, to get the file out of the impasse, Commissioner McGuinness will launch a “public consultation which will feed into a strategy aimed at reducing our excessive dependence on clearing houses in the medium term”, indicates her office. A revision of the European oversight system for clearing houses is also on the cards.

Derek Perrotte, with G. Be. (Brussels office)

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