At stake are transactions worth €927 billion a day and tens of thousands of jobs.Brussels launched an attack on London’s role as Europe’s financial center.

A four-page European Commission “communication” released Thursday has thrown into doubt whether the U.K. will be able to retain its almost €1 trillion euro-clearing business, threatening London’s status as the de facto financial hub of the EU.

It appears to be the first shot fired in the financial services battle following the U.K.’s Brexit vote, with the EU declaring war on euro clearing.

Right now, London handles €927 billion worth of euro-denominated transactions each day, and as much as 75 percent of euro-denominated interest-rate derivatives are cleared at clearing houses in the U.K. Clearing involves an entity standing in the middle of two parties to a transaction, with the aim of managing the risk that arises if one party cannot make required payments.

Although the U.K. is outside the eurozone, it is subject to the EU’s landmark derivatives legislation, the European Market Infrastructure Regulation (EMIR), and to EU supervision.

But after Brexit, that would all change, and the EU is not content to sit back and watch its currency being traded in a non-member country and without the ability to intervene in case of financial instability.

“The fact that euro clearing is currently taking place in London and thereby outside of the eurozone is an anomaly that cannot be maintained after Brexit,” said Markus Ferber, a German conservative MEP and vice chair of the European Parliament’s economic and monetary affairs committee. “On crucial issues of financial market stability, the EU must not rely on the mere goodwill of third-country authorities.”

Although the Commission’s communication is not an official proposal for change to EMIR, the EU’s executive arm plans to publish something in June.

Brussels’ concerns are likely to lead to legislative action putting forward two potential options for U.K. clearing houses. They can either expect to submit themselves to more supervision from the EU, despite having Brexited, or watch the multibillion industry relocate to another place within the bloc.

Brussels’ concerns are likely to lead to legislative action putting forward two potential options for U.K. clearing houses.

“Following the foreseen withdrawal of the United Kingdom from the EU, a substantial volume of transactions denominated in euro would cease to be cleared in the EU and would no longer be subject to … EU supervisory architecture,” the Commission document notes.

Arrangements to ensure clearing houses are subject to safeguards provided by the EU legal framework include “where necessary, enhanced supervision at EU level and/or location requirements,” the document continues.

In a response to the Commission’s announcement, U.K. Chancellor of the Exchequer Philip Hammond said: “London is the world’s No. 1 financial center with high standards of financial supervision, including longstanding cooperation with EU institutions. This benefits the entire continent. We trust everyone in the negotiations will see the value in not undermining that.”

Any move to limit euro clearing in the U.K. would be entirely a political decision as a result of Brexit, but the topic itself is not new.

The European Central Bank attempted to take a pop at London a few years ago, arguing in a location policy that any significant euro-clearing business should be handled in the eurozone.

But in a 2015 ruling, following a U.K. complaint, the EU’s General Court sided with the U.K. Instead of remarking on potential financial stability concerns of euro clearing taking place outside the eurozone, the court ruled the ECB had no authority over clearing in the EU.

Specifically, the court declared that the ECB “does not have the competence necessary to regulate the activity of securities-clearing systems.”

The Commission, by contrast, holds the pen on rules for clearing and looks set to take full advantage of those powers. If so, it would be a post-Brexit-vote move that’s as political as it can get in Europe’s financial services arena.

The U.K. financial industry recognizes that but makes a case for protecting mutual interests. “A forced re-location of euro clearing would lead to disruption, uncertainty and fragmentation of the market,” said Miles Celic, chief executive of TheCityUK, a City of London interest group. “A potentially less liquid, and less competitive EU market would result in higher costs for European savers and investors. … This is in no one’s interest and is entirely avoidable.”

But it’s not guaranteed that any legislative action would lead to euro clearing being driven out of London.

EU regulators such as the European Securities and Markets Authority and the ECB could reach an arrangement whereby they are granted enhanced powers over clearing houses despite those firms being outside the area of EU regulatory remit. The threat to remove clearing from the U.K., however, is sure to be a key item in the inevitable Brexit horse-trading over the coming months.

For London, the loss would be devastating. Some estimate it would cost the city £63 billion. The industry is the centerpiece of banking in the City of London, and any clearing house departures could be followed by large financial institutions and with it, tens of thousands of jobs.

Perhaps that’s what the EU27 wants as a price of separation.



[POLITICO]