The EU Commission wants to force financial firms to relocate part of their securities business from London to EU countries. Specifically, it is about derivatives, about financial bets, for example on interest rate and currency developments that are denominated in euros. Large investors from the EU, such as banks, would then have to conduct at least some of their transactions via so-called clearing houses in the EU instead of just using Europe’s largest financial center, London. Despite Brexit, London and especially the local market leader LCH continue to dominate derivatives trading on the continent. A shift would benefit Eurex, a subsidiary of Deutsche Boerse in Frankfurt, and Amsterdam-based rival Euronext.
The Brussels initiative can be found in a draft law that the Commission intends to present next week and which Süddeutsche Zeitung present. This is the revision of the Market Infrastructure Regulation, abbreviated to Emir. Before this can come into force, the European Parliament and the Council of Ministers, the body of EU governments, must first deal with it. The initiative comes at a tricky time, because the Commission is already arguing with the British government about economic relations – specifically: the customs rules for Northern Ireland.
European investors continue to use London clearing houses for transactions in euro paper because it costs money to move or split up trading. And it works well. But EU Financial Markets Commissioner Mairead McGuinness, an Irishwoman, sees the heavy reliance on British processors as a risk to the stability of the financial markets. After all, London is no longer subject to EU rules, since Brexit the UK has been a third country. The Brussels authority therefore wants to attract more sales to the European Union. But all the advertising and warnings have not brought much so far.
As a result, McGuinness had to renew an exemption rule for UK clearing houses earlier this year. The Commission made a so-called equivalence decision: It stated that these providers are subject to comparable regulations as financial groups within the EU. Therefore, European banks can continue to use London clearing houses without any problems. This exemption would have expired in the summer, but McGuinness extended it by three years to June 2025. It would have been very expensive and could have caused market turbulence if EU investors had shifted their huge volumes of business so quickly. However, the Christian Democrat warned the financial companies that there would be no further delay. So by 2025 they will have to adjust anyway to the fact that clearing in London will no longer be so easy.
“London benefits from twiddling the thumbs of the Commission”
The bill is intended to speed up the redeployment. The Commission combines coercion with incentives. The legal act will lead to more turnover at EU clearing houses, because certain derivatives that are important for the financial markets have to be traded there. At the same time, the authority wants to make it easier for the EU clearing houses to establish new products and processes for the benefit of customers. For this purpose, approval procedures are to be streamlined, which are significantly more tenacious in the EU than in Great Britain, as has been criticized in the industry.
Applause is already coming from the European Parliament – and criticism. The CSU MP Markus Ferber says the proposal has “the right thrust, but it comes much too late”. It is “disappointing” that the Commission only developed a strategy to strengthen clearing houses six and a half years after the Brexit referendum, complains the economic policy spokesman for the Christian Democratic EPP group: “So far, the financial center London has benefited most from the Commission’s twiddling of its thumb.” Ferber also expresses doubts “whether the new measures alone are sufficient to break London’s supremacy”.