Bruised by David Cameron’s defeat over the leadership of the European Union’s executive arm, the U.K. faces its next clash with the EU tomorrow. It touches a sensitive point -- the City of London.
Britain’s lawyers will take on the European Central Bank in a hearing at the bloc’s top court -- fighting policies they argue would punish the nation’s financial hub because the U.K. has kept the pound sterling.
Cameron’s government is attacking ECB policy documents stating that clearinghouses handling trades in euros should be based in the single currency area. Britain says that amounts to an ultimatum that London-based clearers must relocate to the euro area or “be precluded from access to the financial markets in the Eurosystem” on the same terms as rivals that are located there.
“This is one more example of the gradual transformation of the single market into a euro-zone market, which is not what the U.K. or other non-euro countries have signed up to,” Syed Kamall, leader of the EU Parliament’s European Conservatives and Reformists group, said in an e-mail. “It is absolutely vital that we get legal clarity as to whether this is an acceptable shift or not.”
The hearing at the court in Luxembourg is the latest in a series of U.K. maneuvers against EU responses to the financial crisis, including a possible tax on transactions and curbs on bankers’ bonuses. The U.K. is on a losing streak at the European Court of Justice. It failed to overturn EU powers to ban short selling and was told that an early challenge against the transaction-tax plan was premature.
“We want to make sure that there is a level playing field across the EU for British businesses which is why we have taken this issue to the EU court,” a U.K. government spokesman, who can’t be named in line with official policy, said by e-mail.
“We believe that the ECB’s location policy contravenes European law and fundamental single market principles by preventing the clearing of some financial products outside the euro area,” he said.
Cameron last month suffered defeat at the hands of fellow EU leaders who brushed off his vocal opposition to the appointment of Jean-Claude Juncker, the former prime minister of Luxembourg, as president of the European Commission.
“The Eurosystem has major concerns with regard to the development of major euro financial market infrastructures that are located outside of the euro area, since this could potentially place in question the Eurosystem’s control over the euro,” the ECB said in a paper published in July 2011, one of several that sets out the location policy for clearinghouses.
Exceptions to this principle can apply only in “very specific circumstances,” such as for “off-shore payment systems that settle less than 5 billion euros ($6.8 billion) per day, or that account for less than 0.2 percent of the total daily average value” of certain transactions processed by euro-area banks.
“The court hearing is a first skirmish in what might become a much longer running issue,” Nicolas Veron, visiting fellow at the Peterson Institute for International Economics in Washington, said in an interview. “It addresses a key question -- to the extent that the ECB is ready to provide liquidity to the financial system, how far is the U.K. included?”
The ECB pressure to relocate “amounts to direct or indirect discrimination on grounds of nationality,” according to arguments submitted to the court by the U.K.
In practice, the measure cuts off U.K.-based clearinghouses from emergency support and other facilities from euro-area central banks, the U.K. says. London is a global center for clearing of derivatives trades, including those denominated in euros.
Clearinghouses such as LCH Clearnet Group Ltd., majority owned by the London Stock Exchange Group Plc, and Deutsche Boerse AG’s Eurex Clearing operate as central counterparties for every buy and sell order executed. Traders post collateral, and clearinghouses maintain backstop funds, in a bid to reduce the risks posed by individual defaults.
The case “reflects the risk of a potential breakdown of the single market” between “the euro-zone and the wider EU,” said Michael Kent, global head of financial regulation at law firm Linklaters LLP. “The ECB’s argument is that it’s not safe to clear a euro-zone product unless you have access to euro-zone central bank liquidity, and that access won’t be provided to clearinghouses outside of the euro area.”
A spokesman for the ECB in Frankfurt declined to comment. The ruling in the case won’t come for at least several months.
LCH Clearnet’s SwapClear platform handles more than 95 percent of the overall market for cleared, over-the-counter, interest rate swaps, according to data on its website. LCH.Clearnet declined to comment on the court case.
Euro denominated contracts account for about 45 percent of the notional outstanding amount of trades on the platform.
Other central clearers with operations in London include CME Clearing Europe and ICE Clear Europe.
“The ECB won’t stand behind a clearinghouse based outside of the euro-zone, and it can’t be made to do so. It’s that simple,” Karel Lannoo, chief executive officer of the Centre for European Policy Studies in Brussels, said in a telephone interview.
“This case is just a waste of time, like the previous ones on short-selling and the financial-transactions tax. In fact, it’s even clearer than the other two because it’s about the single currency, and the U.K. isn’t in the single currency,” he said.
The cases are T-496/11, T-45/12 and T-93/13 United Kingdom v ECB.