The EU is preparing to offer its banks an 18-month extension on access to London’s crucial markets infrastructure as it seeks to prevent a jolt to financial stability when the UK’s Brexit transition period expires at the end of the year.
The European Commission has proposed to governments that access to UK-based clearing houses — which sit between deals and prevent defaults from ricocheting through the rest of the market — should remain undisturbed until the middle of 2022, according to two people briefed on the draft plans.
Brussels’ position reflects London’s pre-eminence in the market for clearing euro-denominated derivatives, and suggests that financial services are a point of leverage for the UK in increasingly strained trade negotiations with the EU.
Clearing houses, such as the London Stock Exchange Group’s LCH and London-based ICE Clear Europe, are among the most critical institutions in the global financial system. In theory, EU banks automatically lose access to both of them from January 1 next year. The Bank of England and the European Central Bank have warned that an abrupt cut-off would pose a threat to stability across the region.
London dominates the global market for derivatives clearing, and handles the bulk of the €735tn market in Europe. The eurozone offers few alternative venues that can cope with the volume of business. The EU is preparing legislation to toughen its oversight of UK clearing houses after the country drops out of the bloc’s legal structures at the end of this year.
Without this potential extension to the legal recognition for clearing houses such as LCH, EU banks would be forced to start removing their business from them starting next month — a costly and potentially disruptive task.
EU officials do not see reliance on London as a long-term solution to the issue, stressing that any extension must be used to build up the EU’s own clearing capacity.
Under the latest draft plans, access would expire at the end of June 2022, the people with direct knowledge of the matter said. A formal decision on the measure is expected to be taken by the end of this month. The EU declined to comment.
After the UK’s Brexit transition period ends, banks, investment houses and other financial market participants would be granted access across the EU and UK through a process known as equivalence, with each side assessing the other’s regulation and supervision to ensure it meets its standards. Clearing has emerged as a point of tension because it sits at the heart of financial market stability, and regulators in both the UK and the EU are keen to monitor it closely.