The European Union gave London City a postponement on Wednesday (November 10) and said it would allow clearinghouses in the UK to continue serving customers in the block after next June, when market access should expire.
Britain left the EU completely in December last year, and clearing has been politicized as Brussels seeks to build the 27-nation bloc’s equity market to stop dependence on London, which has long weakened other European financial centers.
Temporary market access for UK clearing houses, known as equivalence, was to expire in June 2022, with banks urging Brussels to grant a further extension to avoid multi-trillion euro derivatives market disruptions.
EU Financial Services Commissioner Mairead McGuinness said on Wednesday that more time is needed to build clearing capacity in the EU to cope with a move of euro-denominated businesses from London to the block.
“That’s why I would propose an extension of the equivalence decision for UK central counterparties in early 2022,” McGuinness said in a statement without saying how long the additional market access would be.
The London Stock Exchanges (LSE) LCH unit clears the majority of euro-denominated swaps, and the European Commission set up a working group earlier this year to look at how much of this activity could be transferred to Deutsche Boerse in Frankfurt for direct EU surveillance.
ICE and the London Metal Exchange also have clearing activities in London, which are used by European customers, although Euroswap clearing at LCH has been the EU’s main goal.
LCH said it welcomed the communication, adding that its priority remains to ensure that markets function properly to support financial stability.
Bruce Savage, head of Europe at the Futures Industry Association, said he was pleased that the Commission had listened to the industry’s concerns to prevent negative economic, commercial and operational consequences for EU counterparties and clearing members.
“We look forward to seeing further details on timing and on how the clearing capacity can be expanded in the EU. It is important that any final decision on clearing achieves the best results for clients and customers operating in the EU, UK and globally,” said UK Finance, a body in the banking sector.
Improving the attractiveness of clearing in the EU, encouraging more clearing capacity and reforming supervision would require more time, McGuinness said.
The EU’s executive body had met with opposition from banks, which said a split in clearing between London and Frankfurt would increase costs and fragment a global market.
McGuinness said the extension to equivalence should be long enough to allow the EU to revise its supervisory clearance system and avoid short-term stability risks from a sharp disruption in access to clearing services.
Excessive reliance on UK clearers for some activities remains a source of medium-term financial stability risk, she said.
Banks have warned that forced relocation of clearing could cause activity to relocate to the US instead of Frankfurt, given that US clearers have long-term equivalence.
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