The European Union will extend permission for banks in the bloc to continue using clearing houses in London for a further three years from June while efforts to end “over-reliance” on Britain are stepped up, its financial services chief said on Tuesday.
The European Union wants to directly supervise clearing of euro-denominated derivatives and build up “autonomy” in its own capital market as Britain is no longer subject to the bloc’s financial rules since Brexit.
Mairead McGuinness had already said last November that such permission, known as equivalence, would be extended for an unspecified period from June 2022, when it is due to expire, to give more time to shift clearing from London to the continent.
“We are now consulting member states on this draft equivalence decision, which will take the form of an implementing act. We envisage to propose an extension of the equivalence decision of three years – until end June 2025,” a spokesperson for McGuinness said.
Brussels has sought to persuade banks in the EU to relocate swathes of clearing from operators like London Stock Exchange Group, whose LCH arm clears about 90% of euro-denominated interest rate swaps or about 90 trillion euros, to Deutsche Boerse in Frankfurt but with little success.
Failing to extend clearing permission beyond June risked disrupting markets by forcing banks to rapidly close positions in London and reopen them elsewhere, a costly undertaking.
U.S.-based clearing houses have long-term EU equivalence and banks said they could shift clearing to New York rather than Frankfurt if forced to stop using London.
McGuinness said that in coming weeks she would also launch a public consultation on measures to make the bloc an attractive clearing hub, and on the supervisory arrangements for EU central counterparties (CCPs).
Banks have said they prefer using London because they can net positions across different currencies to save on capital, while Frankfurt largely focuses on just the euro.
Two industry bodies, the International Swaps and Derivatives Association and the Futures Industry Association, welcomed the early clarity on market access and said they would work with Brussels to make EU clearing more attractive.
“This public consultation will feed into a strategy on clearing to reduce in the medium term our over-reliance on UK CCPs,” Mc Guinness’ spokesperson said.