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Territorial claim targets key London sector
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French-led move likely before UK quits bloc
The EU is preparing rule changes that could deprive London of one of its flagship financial businesses by imposing territorial restrictions on the clearing of some euro-denominated transactions even before Britain leaves the bloc.
While the precise form of intervention is undecided, the European Commission is considering backing legal changes to give the European Central Bank a remit over the location of key market infrastructure. The move is would be seen as a provocation by the UK, which for years fought hard to fend off French-led attempts to relocate euro clearing to the single currency area.
French officials are pushing for restrictions on clearing to be included in legislative proposals scheduled for this spring – shortly after Britain says it will initiate the formal Article 50 exit process. In any case, other eurozone and EU officials say a move to restrict euro-clearing outside the eurozone is likely to come before Britain’s expected withdrawal from the EU in 2019.
Any such initiative would face considerable political and technical obstacles. But the willingness of senior officials in Brussels and Paris to move early on territorial restrictions underlines how the issue is likely to become a flashpoint in Brexit talks.
Defending London’s euro clearing business has been a totemic issue for the UK. London is the world’s biggest centre for clearing euro derivatives, handling three-quarters of all transactions, with an average daily value of $573bn, according to an Intercontinental Exchange paper circulated to EU member states.
The paper, seen by the Financial Times, argues that “forced repatriation” of euro clearing would “deprive European banks of access to liquid trading and clearing facilities and create fragmentation”. ICE, the largest operator of exchanges and clearing houses in European utilities, added: “This would increase costs considerably for banks and customers.”
Simon Kirby, the UK’s City minister, has warned that the euro clearing business would probably move to New York if the EU attempted to undermine the UK’s dominant position, leaving Europe “worse off”.
But France’s President François Hollande has called for euro-denominated clearing to be relocated to the eurozone after Brexit, saying that such an outcome would “serve as an example for those who seek the end of Europe”.
In a four-year legal battle, Britain fought off an ECB policy that would have required clearing houses with significant euro-denominated business to be based in the eurozone. But the court victory turned on a narrow technicality rather than Britain’s objections to what it said was discriminatory policy.
A French central bank official urged the commission last week to address the issue in light of Brexit through an update to EU rules on derivatives trading and clearinghouses set to be published by April.
