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MNI: EU Said Heading For Compromise On UK Euro Clearing

MNI (London)

An equivalence agreement with London-based clearers is likely to be extended, officials indicate.

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The EU seems to be heading towards a solution for its dispute with London-based clearing houses and banks that would allow for an extension of an equivalence agreement as it seeks a balanced share of euro-denominated clearing between UK and eurozone centres, EU officials and industry sources told MNI.

The European Commission, charged with negotiating a solution with the big London-based clearing banks, initially took a heavy-handed approach towards encouraging the migration of euro derivative transactions to the single currency bloc. But EU officials now stress that it will be enough if an undefined "critical mass" of cleared positions move to centres in the EU-27.

One source noted that business is moving from LCH to Frankfurt's Eurex at a gradual pace of around 0.5% a month, and that, while big banks have been sluggish, the buy side has responded more energetically to encouragement from the Commission. EU Commissioner Mairead McGuiness, who earlier stressed the need for EU Strategic Autonomy, has since sounded a note of optimism, saying that a cliff edge will be avoided when the temporary arrangement granting London central counterparties equivalence expires in mid-2022.

Even the eurozone clearing industry prefers a "market-driven" approach, rather than EU-mandated transfers of euro clearing, stressing the desirability of a competitive balance between the UK and eurozone in the interests of financial stability.

"The ultimate solution will neither be 100% in the EU, nor 100% in the UK, but a balanced landscape, with heathy competition and a reduced concentration at LCH," one source following the talks said.

REAL ECONOMY IMPACT

The softer tone in EU communication results from hard-headed calculations about the impact of a loss of access to the UK clearing industry on the eurozone real economy, sources said.

"I think … that it relates less to the arguments around stability, which is the key message from LCH and the banks, and more to efficiency, which is the message from the EU real economy. LME Clear (London Metals Exchange) is dominant in metals, for example, so why cut Volkswagen off from that?" one said.

ESMA, the EU Securities Market Regulator, has already granted recognition to LME Clear as a Tier 1 Third country CCP under the EU's EMIR 2.2 clearing legislation, but LCH, as well as ICE, face further regulatory obstacles, having been classified as Tier 2 CCPs, meaning that they are deemed to pose a more significant level of systemic risk to the financial system.

Some sources said that this will be the main battleground for the London clearing industry.

ESMA's CCP Supervisory Committee is conducting a substantial risk assessment ahead of the expiry of the equivalence period for UK CCPs and is empowered to take measures to address financial stability risks, such as barring them from providing certain services.

EU officials and its clearing sector might also insist that EU-based derivatives customers using UK CCPs operate a significantly active second account with an EU counterparty, as a transitional step, sources said.

"This could smooth the situation and avoid any decision to force relocation, where the market does not move sufficiently on a voluntary basis. This solution could encourage the market to migrate bit by bit," one source said.

Equivalence decisions for other UK financial services sectors are not on the table at all, sources said, pointing out that this had been preempted by the numerous signals from UK authorities that they intended to opt for deregulation as the route to competitiveness.