MNI SOURCES: EU Lays Down Law To Clearing Houses On Exiting UK

The European Commission took a hard line with clearing houses in a recent Working Group meeting on relocating euro derivatives exposures from London to the EU, dismissing objections from industry representatives and setting a tight schedule to tackle technical obstacles before the June 2022 deadline, participants in the meeting told MNI.

London-based clearing member banks warn that moving euro exposures is next to impossible, but Ugo Bassi, head of markets at the Commission's financial services directorate, insisted that Brexit makes a continuing systemic role for UK clearing houses unacceptable and that the question is not whether but how euro exposures can be transferred to the EU, one participant in the Working Group said.

The Commission has scheduled monthly plenary sessions of the Working Group along with weekly breakout meetings in the lead up to the June 2022 deadline after which London clearing houses lose their authorisation to operate in the EU.

"My sense is that the authorities have not yet understood the problem of tearing up existing contracts. You can't just transfer from one CCP to another, both parties have to agree," said one banking sector representative at the meeting, also attended by financial regulators like the ECB and ESMA.

SOURING ATMOSPHERE

Two major U.S. banking groups, with a group base in London were said to have been irritated not to receive an invitation, which some saw as a further Commission effort to turn the screws on banks headquartered outside the euro area.

London-based clearing member banks argue that much business will leave the UK not for the euro area but for the U.S., where CCPs enjoy equivalence status with EU clearers. But the lack of euro liquidity pools in the U.S. might make this a more costly option.

"No-one is saying everything in the EU. It is about not 100% in the UK and an appropriate balance in light of monetary policy and financial stability prerogatives," said one EU source.

The EU-UK rift over the Northern Ireland Protocol has further soured the atmosphere in wider talks over a financial sector memorandum of understanding, which is set to be concluded by the end of this month but which will commit both sides only to regulatory cooperation, rather than the equivalent status which would allow mutual market access.

The Northern Ireland impasse as well as EU perceptions that the UK authorities are already diverging from EU regulations could mean any subsequent talks on equivalence will be stillborn.

"The UK will have deregulated so much there will be no way back to equivalence," the source said.