Photographer: Chris Ratcliffe/Bloomberg

U.K.'s Bid to Retain Euro Clearing After Brexit Gains EU Allies

  • Sweden says fragmentation costs would be passed to end-users
  • France continues to lead push for greater control post-Brexit

The U.K. has gained potential allies in its bid to hold on to the business of clearing euro-denominated derivatives after Brexit.

Sweden said a European Union proposal to allow authorities to force the biggest foreign derivatives-clearing firms to set up shop in the bloc could prove excessive, according to a Sept. 4 document that summarizes the positions of 10 national governments. Spain highlighted the “considerable costs” a location policy would entail, and Ireland warned that it could leave firms scrambling to find clearing alternatives.

France continued to lead the charge for greater EU control over clearing of euro derivatives, a position staked out by then President Francois Hollande shortly after the Brexit referendum in June 2016. The U.K. renewed its opposition to the plan, saying it would “increase costs and undermine stability by fragmenting markets and reducing their efficiency.”

The clearing of euro-denominated derivatives had already become a Brexit flash point when the European Commission, the EU’s executive, laid out its proposal in June. Under the plan, smaller firms would carry on operating under existing rules, while those deemed systemically important would face stricter scrutiny and, ultimately, could be forced to move clearing of derivatives denominated in EU currencies inside the bloc.

‘Strengthened Role’

Clearinghouses stand between the two sides of a derivative wager and hold collateral, known as margin, from both in case a member defaults. About 75 percent of trading in euro-denominated interest-rate swaps takes place in the U.K., according to Bank for International Settlements data from April 2016.

Sweden said the impact assessment of a location policy was insufficient, according to the document prepared by the Council of the European Union and seen by Bloomberg. “Costs of fragmentation due to potential relocation requirements will most probably be passed on to end-users of clearing services in the real economy, which would be unfortunate,” the document states.

Sweden also questioned the motives behind the “strengthened role” for central banks foreseen in the proposal. The European Central Bank has mounted an aggressive campaign for control of euro clearing, a business dominated by London Stock Exchange Group Plc, majority owner of the world’s largest clearinghouse, LCH.

The French renewed their advocacy of tough controls, arguing that the commission and the European Securities and Markets Authority should be given the “ability to impose additional requirements” on clearinghouses “in order to have a say (up to a veto right if needed) on some decisions taken by third-country authorities,” the document states.

France and Germany said the commission’s proposal should be tweaked to allow for more granularity when assessing the importance of a clearinghouse. A denial to grant a third-country firm access to the EU market “should include the possibility to limit the refusal to certain categories of financial instruments” like euro-denominated interest rate swaps, Germany said.

To address the “legitimate questions about the future role of EU authorities in the oversight of U.K. CCPs as the country leaves the union,” the U.K. said it would “seek to establish close and cooperative supervisory arrangements through the negotiations on the future relationship between the U.K. and EU,” according to the document.

EU member states and the European Parliament are just beginning to discuss the proposal. A spokeswoman for the Council of the European Union declined to comment on the document.

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