EU regulators should not aspire to have regulatory control of the Euro-clearing industry, the Bank of England has argued after the European Central Bank – or ECB – announced that it wants to move the Euro-denominated clearing business to the Eurozone where it will be under the ECB’s regulatory control.
The €660 trillion clearinghouse market is dominated by three London-based firms – LCH, ICE Clear Europe, and LME Clear. All three expect to continue serving the bloc’s customers directly from London, despite concerns that the may be forced to re-located following Brexit on March 29.
Clearing involves passing stock, bond, derivatives and repo trades through a third party backed by a default fund to ensure completion of the transaction even if one side involved in the deal goes bust.
The Bank of England has long argued that this is a form of protectionism, although on bank’s director of market infrastructure, David Bailey, acknowledged that the ECB had a “valid interest” in monitoring London’s clearinghouses as the market carries systemic risks for the Eurozone.
As the European Banking Authority is leaving the UK for Paris, the Bank of England is keen to maintain cooperation with ECB regulators. However, the BoE also wants to assert regulatory primacy, with Bailey warning that clearinghouses should not have to comply with “overlapping or conflicting requirements.”
The ECB is to finalise the clearinghouse regulations ahead of the UK’s exit from the EU on March 29, 2019.
Authorities in Brussels and London have reassured markets that clearinghouses will continue to operate under temporary licenses, even in the event of a hard Brexit. In the long run, the question remains as to how the Bank of England and the ECB will coordinate.
Competitors are looking to snap up part of the market. Deutsche Boerse’s Eurex is offering incentives to attract clearing in interest rate swaps from London. Banque de France Governor Francois Villeroy de Galhau said in November 2018 that he wants to see interest rate swaps cleared in the French capital as well.