UK Edition
LSE fires back at EU plot to seize euro-clearing
The London Stock Exchange has fired back at Brussels' proposal to restrict London's ability to host euro-clearing, warning that any restriction on the clearing of Euro swaps would "damage European issuers, savers, investors, pension funds and intermediaries".
The highly lucrative euro-clearing market has been the subject of a deepening debate between Europe and the UK ever since Britain voted to leave the European Union, with politicians on the continent arguing that EU derivatives should be cleared in the EU rather than London post-Brexit.
The European Commission will present reforms on derivatives clearing later this week in a bid to simplify rules where "immediate action is necessary", according to sources, with a draft of the proposals leaked to the Financial Times pointing to measures that could force UK firms to relocate or be subject to EU rules.
Britain is home to some of the world's largest clearing houses, which act as intermediaries between buyers and sellers of financial assets, including interest rate swaps, with LSE-owned LCH Group by far the biggest.
Speaking on behalf of the LSE, a spokesman said that while the exchange was "strongly positioned to adapt to any outcome from the debate", a restriction on euro-clearing could see Europe do itself damage by forming a "parallel less liquid, smaller onshore" market.
He added that in the three months to March, just 7pc of interest rate swaps - the largest asset class globally - going through its global clearing house were Euro swaps from an EU-entity.
The LSE was not the only one to sound a warning to Brussels on Tuesday, with the Futures Industry Association (FIA), a trade body representing the cleared derivatives industry, also weighing in.
“A forced relocation of euro-clearing to the Continent would raise costs for end-users, including European companies, and could cause disruption and fragmentation in the markets," said Simon Puleston Jones, the head of Europe for FIA.
"A number of options are available to address financial stability concerns, ranging from forced relocation to increased EU regulatory oversight of UK clearing houses. Minimising disruption, uncertainty and instability should be key considerations.”
The European Commission is presenting its euro-clearing proposals at a particularly sensitive time for Britain and the EU, with the Commission's president Jean-Claude Juncker reportedly accusing Prime Minister Theresa May of being "deluded" over Brexit following a dinner last week.
One senior executive in the clearing market, who asked not to be named, said that proposals to force Britain to give up its right to clear trades denominated in euros was political "huffing and puffing" that would see Europe score an "enormous own goal".
That echoes the comments made by City veteran Michael Spencer last week, when he told an audience in London that such a move would be a “deeply, deeply bad event” that could cripple European firms.
However Graham Bishop, a consultant on EU integration and a former banking adviser, argued that the over-the-counter (OTC) derivatives market "should never have been allowed to get to the size it is" and is being ignored in this debate.
"I've no doubt at all that euro-denominated clearing will leave London and most of it will go to the Eurozone," he said.
That would be a major blow to the UK, which only emerged from a four-year legal battle with the European Central Bank over clearing trades in the eurozone in 2015.