European governments seek to unshackle from UK financial infrastructure

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EU governments on Wednesday (6 December) signed off on controversial plans intended to cut their dependence on UK clearing houses in the wake of Brexit.

The bloc wants to kick the habit of depending on financial infrastructure that lies outside of its regulatory reach – including institutions in the nearby financial centre of London.

Clearing houses are centralized venues where trades agreed on stock exchanges are finalised, an arrangement supposedly safer than allowing complex bilateral settlements between banks.

But EU policymakers believe two UK-based clearing houses, the London Stock Exchange Group’s LCH and ICE Clear Europe, could pose a risk to the bloc’s own financial stability, and are looking for ways to tempt EU banks to domestic providers.

A draft law agreed by the EU’s Council, which groups member states, warns of the risk of “excessive exposures” to major clearing houses outside the bloc, and said banks should also keep a separate account with an EU alternative, to switch to in a crisis.

“The active account requirement is a new requirement,” the draft law said. “The novelty of the requirement and the need for market participants to gradually adapt to it should be properly taken into account.”

The regulation, known as EMIR, must now be ironed out with lawmakers from the European Parliament’s Economic and Monetary Affairs Committee, which last week voted on its own version.

The European Commission’s plans to boost the bloc’s own clearing capacity has been backed by the European Central Bank, which in an April opinion strongly welcomed measures “supporting a gradual creation of a resilient and liquid Union-based clearing market.”

But they’ve also proved controversial with an industry that doesn’t want to splinter its activity, raise costs, or give unchecked powers to EU securities markets watchdogs.

“A location requirement for market participants would make the EU one of the only advanced capital markets with such a policy,” said a September statement by the International Swaps and Derivatives Association.

“Ultimately, it would harm European pension savers and investors,” said the statement, made jointly with EU banking and fund lobby groups, and warning of a competitive disadvantage for the bloc.