EU proposes rules to spur clearing shift to bloc from London
THE European Union will require banks to monitor their exposure to clearing houses and maintain active clearing accounts in the bloc as part of new financial market rules put forward by its executive on Wednesday (Dec 7).
The European Commission’s proposals are designed to encourage more business to move to clearing houses in continental Europe from the City of London by June 2025, when a temporary waiver that allows its banks and money managers to clear trades in the UK expires.
The EU wants to reduce its dependence on London, which continues to dominate Europe’s financial infrastructure even after Brexit. Investors have so far been reluctant to shift trades to far smaller EU clearing houses, a key part of the plumbing that runs through the financial system.
Clearing is a key part of the finance world supporting banking, technology and legal jobs across the City of London. Clearing houses such as London Stock Exchange Group’s (LSEG) LCH operate at the centre of markets, collecting collateral from both sides of a trade to ensure that a default on one does not spread panic through financial markets.
“I think we have talked enough to the stakeholders that they understand what we are doing and why we are doing it, and I think there is less resistance than there was in the early stages,” Mairead McGuinness, the European Commission’s head of financial services, told reporters in Brussels.
She stressed that the move should not be regarded as “trying to weaken” London’s position but is instead about ensuring the bloc’s financial stability. She noted that about 60 per cent of companies are understood to currently have active clearing accounts in the EU.
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The European Securities and Markets Authority, the bloc’s markets regulator, will determine the threshold that banks will need to clear when it comes to clearing volumes in the bloc, Valdis Dombrovskis, the commission’s executive vice-president, told reporters in Brussels.
The new proposed measures will also allow clearing services providers to expand their products range quicker and easier, and help increase transparency of margin calls, according to the commission materials.
A press release accompanying the announcement said the draft law is designed to “reduce excessive reliance” on external clearing houses. That suggests UK clearing houses will continue to service the bloc after 2025, industry figures said.
The LSEG welcomes “the acknowledgement of the importance of continued access for EU firms to UK CCPs (central counterparty clearing house) in order to hedge their risks in all currencies and manage their costs efficiently,” a spokesperson said. “We will continue to engage and cooperate with the relevant regulatory authorities in respect of the long-term recognition of LCH on an ongoing basis.”
McGuinness, whose term ends in 2024, said in a separate briefing that the market should be ready for the 2025 deadline and that she is not planning an extension of the existing equivalence decision. She declined to provide the share of business the EU is targeting.
“Have I ruled out equivalence? I have been very clear of the deadline,” McGuinness said to reporters in Brussels. “At this stage definitely we would be saying, repeating, that it is June 2025. I can only speak for my own term here.”
The proposals are part of the EU’s Capital Markets Union initiative, which is designed to break down barriers between the bloc’s financial markets and address clearing, insolvencies and listings.
“We are preparing our capital markets for the future,” McGuinness told Bloomberg Television. “At the moment, we have too many fragmentations – and that means that business large and small do not benefit from capital markets.”
The Commission also proposed amendments to boost investment into smaller and mid-sized firms. The planned change will raise the threshold below which the rebundling of trading execution fees and research fees is allowed to 10 billion euros ($10.6 billion), up from one billion euros (S$14.3 billion), a limit that was only set during the pandemic.
The move is designed to encourage investors to pay more attention to smaller and mid-sized firms. Since the introduction of the MiFID II directive in 2018, unbundling has been blamed for removing the incentive for banks to produce research on smaller stocks and making it harder for them to attract capital.
Companies will also see listing requirements and documentation simplified so as to reduce cost. The proposals also aim to harmonise insolvency proceedings across the bloc. These include actions to preserve the insolvency estate, and fair distribution of the recovered value among creditors to foster cross-border investment.
The proposals will be submitted to the European Parliament and member states for adoption.
The collapse of FTX into bankruptcy last month is also a focus for EU officials as the bloc’s Markets in Cryptoassets directive moves towards an expected vote in February. McGuinness said the exchange’s failure showed a need to regulate the sector on a global scale.
“Anyone who is reading headlines has got to be more than cautious about crypto, and that is no bad thing,” she said in the Bloomberg Television interview. “Too many entered this space thinking that the only way was up – and we know that what goes up can come down.” BLOOMBERG
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