Getting balance right on UK euro clearing may take years

The European Union won’t suddenly pull up the drawbridge on Britain’s financial services sector. Reducing reliance on the City of London for euro clearing could take years, said a top European Commission official. The EU executive said that EU market participants could continue clearing euro denominated derivatives in London beyond June 2022. The extra period would allow time to expand the bloc’s capacity in clearing, which is a core part of the financial system’s plumbing.

John Berrigan, head of the commission’s financial services unit, told an event held by Brussels think tank CEPS said that the City of London is a global financial centre that they will always want to use because it is next door and also convenient. The issue here is one of balance. Berrigan stated that balance and they will have to work on in the next few years. Banks say that forcing a shift in euro derivatives clearing from the London Stock Exchange to Deutsche Boerse in Frankfurt would be costly and fragment markets.

Before deciding on the length of Britain’s market access extension, the EU is waiting for a report from the bloc’s markets watchdog ESMA. The ESMA report is expected to reach conclusions by year end on whether UK clearers are so systemic, that the EU business should be shifted to the bloc. The commission will then see what all the measures might be required to move clearing. And also, how long would be needed to implement them while minimising costs and stability risks. If they make it an open ended, then the risk is that they will never finish. Berrigan added that it is about finding the right balance in terms of their relationship.

Froukelien Wendt is a member of ESMA’s clearing supervisory committee. He said that the report looks at the effect of cutting off EU market participants from clearers in London. There are also benefits and they relate to the ability of EU supervisors, EU authorities especially in times of crisis. Wendt said that this is to access information and to be able to intervene effectively. The EU will have to build up best in class clearing capacity that is attractive and competitive.