Financial industry urges Brussels to extend access to UK clearing houses

Clearing and settlement updates

US and European banks and asset managers have urged Brussels to extend the permit granting EU banks access to UK clearing houses to prevent a “major” market disruption when the licence expires next year.

A clutch of leading lobby groups including the New York-based International Swaps and Derivatives Association (Isda) and the European Fund and Asset Management Association have asked the European Commission for more time for the market to shift business away from the UK.

The push will reignite one of the longest-running, but not fully resolved, issues in financial markets created by the UK’s exit from the EU at the start of 2020. Since the 2016 referendum, EU politicians have been pushing market participants to move clearing of euro-denominated swaps from London to the eurozone. Financial companies, however, have preferred to keep most of the €100tn of open contracts at UK-based clearing houses, reflecting the dominance of London’s clearing industry.

Clearing houses, which sit between the parties in financial deals and prevent defaults from ricocheting through the rest of the market, work more efficiently when they oversee large pools of transactions. Users are able to save millions of dollars a day in collateral and insurance by “netting” deals.

The EU last year extended the permit for banks to clear deals in London to mid-2022 and made it clear it wanted the business to move, but the market share of London Stock Exchange-owned LCH, a major clearing house that is home to the large interest rate derivatives business, has declined by only a couple of percentage points to 83 per cent.

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Without an extension, European institutions will be forced to start removing their business from the end of March next year, which they describe as a costly and potentially disruptive task.

“We respectfully request the Commission to provide clarity as soon as possible and well in advance of March 2022 in order to prevent negative financial, commercial, operational and level playing field effects on EU counterparties and clearing members,” said the letter to Mairead McGuinness, the EU’s financial services commissioner.

The groups called for an extension to the temporary deal that grants EU banks and asset managers the ability to clear deals in London or for regulators to come to an agreement that would allow for permanent access. The debate revolves around whether EU and UK financial watchdogs deem each other’s supervisory frameworks as “equivalent”.

“We would like to see a joint supervisory model that will avoid market disruption, higher risk and elevated costs for EU financial institutions,” said Scott O’Malia, chief executive of Isda.

Earlier this week Andrew Bailey, governor of the Bank of England, told a Bloomberg event that banks should hold back from moving their euro clearing business from London because it would put the responsibility on authorities to resolve the situation.


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