The EU Commission plans to withdraw parts of the billion-dollar derivatives market from London after the Brexit. Transactions with securities settled in euro should then be transferred to the European Union if the relevant clearing house plays a key role in the financial system with its trading volumes.
This was announced by the Brussels authorities on Tuesday. Their draft law still requires the approval of the EU Parliament and member countries. The head of the London Stock Exchange criticized the plans and warned of disadvantages for traders. The EU exit from Great Britain was targeted on 29 March 2019.
Banks must handle most derivative transactions through clearing houses. These are in the trade between the buyer and the seller and jump in when one of the trading partners fails. This will increase the transparency and security of the financial system.
As the deal with derivatives issued in euro is largely settled in London, the EU is looking for a solution for the post-Brexit period if Great Britain has become a so-called third country and is thus no longer subject to the existing European rules.
This is why the EU market surveillance authority, ESMA, which is based in Paris, is to be given more powers over national regulators. In the first place, ESMA would have “extended oversight” outside the EU. Such authorities have, for example, US authorities, which are already examining dollar transactions in London and are able to examine sensitive data.
In a second step, ESMA will be able to decide whether a non-EU settlement house manages systematically large volumes of derivatives issued in euro. If this is the case, the EU Commission, in a final step and with a “limited number” of clearing houses, wants to move the business. However, the authority did not specify which volumes are system-relevant. The European Central Bank (ECB) is also to be involved in the supervision of the houses.
The EU Commission expects fees for clearing houses to be passed on to their customers. These costs are, however, probably very limited compared to the volume of financial instruments processed. If a house is forced to move to the EU, higher trading costs may arise as a result of fragmentation of the market. The Brussels Authority intends to avoid this effect through appropriate risk assessments in individual cases.
The market for over-the-counter derivatives is currently estimated to be $544 trillion, according to estimates by the EU Commission. 62 per cent of these are cleared through clearing houses, of which there are 17 in the EU, including Great Britain. In London, tens of thousands of jobs are dependent on the euro clearing business. British politicians and representatives of numerous large banks are strictly against a shift.
According to the head of the London Stock Exchange LSE, Xavier Rolet, a deduction is at the expense of the customers. In addition, on the continent an “illiquid and systematically more dangerous trunk market” would arise – and outside the EU a liquid but not regulated market, Rolet warned investors on Monday evening. The LSE subsidiary LCH is currently processing the majority of all euro-denominated interest rate swaps.