MNI SOURCES: EU Retreats From Equivalence Threat In CCP War

The European Commission seems to be edging away from the nuclear threat of denying London's clearing industry equivalence as a way to force the euro-denominated derivatives clearing business to move to the eurozone, sources with knowledge of the matter told MNI.

Instead, the Commission is likely to continue to allow eurozone-based clearing members to continue to access London-based central counterparty clearing houses, like LCH, at least for a while, they said.

Discussions in the working group set up by the Commission to look at how to move euro-denominated derivative clearing out of London have made it clear that the financial industry is deeply reluctant to move, the sources said.

"There seems to be no huge willingness from large parts of the market to change the way things are done at the moment," said one contact following talks closely. "The Commission thought they might get much more backing from (clearing) clients, but they aren't."

There are also questions over the readiness of eurozone CCPs to take on the huge volume of business currently done in London.

"The CCPs of course are saying, yes we are [ready]. And, while Clearing Members say they are not taking sides, they then say, what about this? Or what about that? Putting up little hurdles all the time," the source said.

The Commission is now edging back from its earlier willingness to threaten to withdraw the equivalence which London CCPs currently enjoy under a temporary arrangement until mid-2022. It now considers that such a move "would be going too far," the source added.

TEMPORARY TRUCE

Brussels is also said to be conscious that earlier comments from senior officials created an impression that the EU is taking a protectionist stance.

Commission officials had hoped that the promise of European Central Bank liquidity should a CCP run into trouble would prompt clearing members and clients to move. They had also expected that eurozone CCPs might have better developed as leading international players in their sector.

"We think equivalence is needed at the end of the day," a European banking industry source said, suggesting a further temporary and limited extension of current arrangements might be the best compromise.

"If you want to keep the pressure on the industry to relocate, it's better to give another 18 months, and not a longer, say like a 10-year term, during which the industry could work with the Commission on a market-driven process of relocation, with the right incentives in place," the industry source said.

Central banks could play an important catalytic role in the important process of building liquidity at euro area CCPs, the source said.

"One of the questions on the table is what about the public sector – could the central banks clear as well and maybe grow the liquidity of eurozone CCPs that way?"