U.K. Accepts EU's Need to Share Clearing Oversight, Hammond Says

  • Hammond says close regulatory cooperation needed after Brexit
  • ‘Enhanced equivalence’ needed for cross-border business

Philip Hammond

Photographer: Luke MacGregor

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The U.K. accepts that the European Union needs to share in the supervision of clearinghouses and other parts of financial services plumbing if it is to allow the lucrative business to remain in London after the nation quits the bloc, Chancellor Philip Hammond told lawmakers.

The European Commission, the EU’s executive arm, argues that Brexit presents a “significant challenge” to oversight of the world’s major hub for clearing of euro-denominated derivatives because its rules will no longer directly apply. The commission said earlier this year that about 97 percent of euro-denominated over-the-counter interest-rate derivative trades go through London’s main clearinghouse.

Speaking to the Treasury Committee in London on Wednesday, Hammond acknowledged member states’ concerns about having clearing of contracts in the single currency located in a jurisdiction beyond the reach of its institutions and courts. The City also houses the most important parts of the region’s capital markets and its wholesale banking business.

“We will have to work with our EU partners to construct governance, supervision frameworks that allow them to be comfortable about those arrangements,” he said. The U.K. will have to demonstrate that it is possible to “protect financial stability, to protect their sovereign interests in the operation of the financial services system while still allowing the critical mass of financial services business in London to operate cross-border.”

His comments on tight cooperation contrasted with the theme of much of the session with lawmakers -- how the U.K. can prepare for the possibility of Brexit negotiations breaking down without a deal. The government has stepped up both its rhetoric and planning for a no-deal scenario, as talks are making scant progress in Brussels.

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The chancellor, who is pushing for the U.K. to maintain close ties to Europe despite opposition from some Cabinet colleagues, said some kind of “enhanced equivalence” would be needed for financial services after Brexit. The framework would have to recognize international standards and be broader than the equivalence the EU currently offers U.S. firms, he said.

“The equivalence the European Union offers to U.S. financial services businesses is an asymmetric and unilaterally granted equivalence that can be withdrawn on very short notice, and that would not be a basis on which to operate a serious cross-border financial services business,” he said.

Clearinghouses, which stand between the two sides of a derivatives bet and hold collateral in case one defaults, have grown in importance since the 2008 crisis. That’s prompted the European Central Bank, the euro zone’s main financial services supervisor and its monetary authority, to attempt to seize oversight of the industry.

The U.K. argues that having clearing in a single place allows a critical mass of trading to develop, boosting liquidity and holding down costs. That advantage would be lost if clearing of euro-denominated contracts was forced to move, probably to the advantage of New York. The risks of market fragmentation are gaining growing recognition in Europe, Hammond said.

While the government appreciates the concerns of the EU27, the U.K. can’t allow financial stability to act as a cover for what are “blatantly protectionist proposals” designed to take business from London, Hammond said.

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