Brussels has pulled back on plans to bring a key financial mechanism under EU ownership, in what one EU official described as a “win for the City of London”.
The bloc had previously been aiming to remove its reliance on the City of London for clearing Euro derivatives. But a backlash from banks and fund managers has led to the plans being scaled back.
The UK’s financial centre had maintained its grip on clearing euro-denominated derivatives even after leaving the EU in 2020 despite consternation over doing so. Then-French president François Hollande said after the referendum in 2016: “The City, which, thanks to the EU, was able to handle clearing operations for the eurozone, will not be able to do them.
“It can serve as an example for those who seek the end of Europe. It can serve as a lesson.”
The majority of clearing in interest rate swaps (IRS) in Euros is done by the London Stock Exchange Group, by the US exchange operator ICE.
European banks and fund managers hit back at plans to force them to leave, saying it would incur extra costs to move business out of the UK.
The EU has since reached a provisional agreement, establishing an “active account requirement” for firms. This means banks must have an account with an EU-based clearing house to clear contracts – a climbdown from the previous attempt to make them leave entirely.
A small number of trades must be enacted through the European clearing houses, the new rule says.
The minimum threshold will be set at five trades for each relevant category and depend on the value of deals done, with a maximum of 900 trades per year.
Vincent Van Peteghem, finance minister for current EU president Belgium, said: “This will bring more clearing services to Europe and enhance our strategic autonomy.”
“It will also contribute to stabilising the market and make sure it functions efficiently, which is a prerequisite for a fully-fledged capital markets union,” he added.
Angus Canvin, the director of international affairs at the trade body UK Finance described the new rules as a “victory for pragmatism”.
While William Wright, founder of the New Financial think tank, said it was a “sensible compromise”.
Several exchanges – including US Nasdaq, Deutsche Boerse and Swiss SIX Group’s Madrid Exchange are already aiming to attract businesses away from London.
The deal has not been universally praised, however.
Markus Ferber, a German centre-right member of the parliament, said the City of London won out from the agreement because the amount of “preconditions, exemptions and review clauses” meant it was merely a “tiny step”.
He said: “The big winner of last night’s agreement is the City of London that benefits from the status quo. In particular, the French government has once again not taken a European perspective, but has done the bidding of large US investment banks.”
The EU has given London-based clearing houses equivalence until June 2025. However, it could take years for significant volumes to move from London to mainland Europe.
The new rules will come into force after EU states and full European Parliament have formally approved the deal.
