Detailed analysis is needed before the European Union can decide on long-term access for the London Stock Exchange to clear euro denominated derivatives for customers in the eurozone, according to Klaus Loeber, a senior supervisor at the European Central Bank.
Loeber, was being quizzed by members of the European Parliament about his appointment as chair of a new EU clearing committee that will advise the European Commission and directly supervise foreign clearing houses serving the bloc.
Reports said that Loeber commented on the need to look closely at longer term implications by taking into account the ability of EU firms to access global markets without undue costs and the role of sovereignty in EU markets.
“This requires analysis, very concretely of specific products, services, to see where there is a significant interest on the side of the EU to have a more direct influence,” he said.
He added that the EU has found itself in the “slightly unusual position” of having a major financial centre close by that is outside the euro zone and, from January, outside the direct influence of EU law.
Loeber said, “What is key for me is that there is clear analysis for the stability implications, both in regards to relocation and non-relocation, and to balance this with a clear strategy and a clearly communicated strategy.”
Clearing is one of the big battlegrounds but even before the UK voted to leave the EU, Paris and German exchanges were hoping to wrest business away.
London dominates the European market for swaps and futures clearing, handling the bulk of the €735tn market. The main players are LCH, part of the London Stock Exchange, ICE Europe and LME Clear. By contrast, Europe has few alternative venues to cope with the volume of business.
LCH has already moved clearing of euro repurchase agreement or repo contracts from London to its Paris subsidiary,
It is difficult to predict the outcome of the Brexit negotiations. At the moment, it does not look like the UK and EU will strike a deal by the 31 December deadline which signals the end of the post-Brexit transition period.
In July, Valdis Dombrovskis, the European Commission’s executive vice-president in charge of financial policy, granted a reprieve by introducing “time-limited” access rights to ensure that European companies could still access UK-based clearing houses after the end of the year.
At the time he said, “This decision is being taken to address the possible risks to financial stability related to the specific area of derivatives clearing. However, we would encourage all market participants to prepare for all possible eventualities, as we have consistently called on them to do throughout this process.”
In the future, financial market access between the EU and UK will be determined through a process known as “equivalence”, whereby Britain and Brussels assess whether each other has sufficiently stringent regulation and supervision of the sector.
The EU is preparing legislation to tighten its rules for oversight of UK clearing houses.