EU to end reliance on post-Brexit London for clearing euro derivatives

The European Union stated that its provisional agreement to remove the bloc’s significant reliance on a post-Brexit London for clearing euro derivatives will boost mainland Europe’s capital strength, Reuters reported on Wednesday.

The London Stock Exchange Group handles the majority of clearing for interest rate swaps (IRS) denominated in euros, which are commonly used by businesses as a hedge against unforeseen changes in borrowing costs.

Large volumes of Euribor futures are cleared by the American exchange operator ICE in London.

Clearing helps increase trading liquidity in a specific location and guarantees that a stock, bond, or derivatives trade is completed even if one side of the transaction fails.

Belgium’s capital Brussels wants direct oversight of euro clearing for banks and asset managers located within the bloc by EU regulators, especially in light of Britain’s requirement to abide by EU financial rules following its departure in 2020.

“This will bring more clearing services to Europe and enhance our strategic autonomy,” Vincent Van Peteghem, finance minister for the current EU president of Belgium, who took part in negotiating the agreement with the European Parliament, said in a statement.

The U.S. Nasdaq, Deutsche Boerse, and the Madrid Exchange of the Swiss SIX Group are already making greater efforts to draw in business from London.

The agreement was criticised by German center-right parliamentarian Markus Ferber, who claimed that the new regulations are a “tiny step” because they contain “preconditions, exemptions, and review clauses.”

“The big winner of last night’s agreement is the City of London that benefits from the status quo. In particular, the French government has once again not taken a European perspective, but has done the bidding of large U.S. investment banks,” Ferber said.

With the large positions involved, moving substantial volumes from London to mainland Europe could take several years, and some business has already moved to the US.

On Tuesday, LSEG’s notional outstanding in euro IRS was €145.3 trillion; however, only a small portion of this was exchanged with EU counterparties. At the end of December, Deutsche Boerse’s Eurex Clearing had €14 trillion in total.

Requirement for the deal

As per the EU statement, the agreement establishes a “solid active account requirement” that mandates banks and asset managers within the bloc to have an account with an EU-based clearing house to clear contracts like euro interest rate swaps.

One of the requirement was for “counterparties above a certain threshold to clear trades in the most relevant sub-categories of derivatives of substantial systemic importance” to show that the accounts are also being used.

According to the statement, banks and asset managers within the bloc ought to consistently settle “at least five trades” in every one of the targeted derivatives categories.

“Furthermore, a Joint Monitoring Mechanism is created to keep track of this new requirement.”

In a separate statement, EU lawmakers said that if there is still a high level of reliance on London, the European Commission must take additional action within two years.

International banks have criticised the EU law, claiming that their ability to compete internationally may suffer if they are cut off from global pools of multicurrency liquidity at LSEG in London.

EU clients are still worried about having to open operational accounts at EU clearing houses, according to LSEG.

“We call for proportionality in the implementation of these requirements in order to ensure that EU firms are not negatively impacted,” LSEG said in a statement.

Clearing houses based in the UK were granted permission by the EU to serve customers in the bloc until June 2025 at the time of Brexit four years ago. Market players were under increased pressure as a result to move clearing from London to locations like Frankfurt, Madrid, and Stockholm.

The agreement will be formally approved by all EU member states and the European Parliament before the new regulations take effect.