07 July 2014

Financial News/FT: Clearing houses braced for ECJ hearing

The case, which starts on July 9, relates to a legal action brought by the UK against the European Central Bank which wants clearing houses that handle sizeable amounts of euro-denominated business to be located in the eurozone. The UK claims the ECB’s location policy for clearing houses is unlawfully discriminatory against countries outside the eurozone and goes against the very concept of a European single market.

Alexandria Carr, a financial services lawyer at law firm Mayer Brown, said: “The UK has strong legal and political arguments in its favour but, as recent decisions have shown, the European Court of Justice has a tendency to show deference to the EU institutions which determine the policies under challenge.”

The Financial Times has also covered the story on July 9th, reporting:

'The UK argues that the ECB lacked the competence to publish the contested policy, and that it would infringe single market rules by potentially forcing clearing houses to relocate their headquarters to euro countries. The UK fears that, in case of crisis, London-based clearing houses will be cut off from ECB liquidity facilities, according to pleas published in the EU’s official journal.

In the policy paper published in July 2011, the ECB said it had “major concerns” about the development of major euro financial market infrastructure outside the euro area, “since this could potentially place in question the Eurosystem’s control over the euro.”

Michael Kent, a partner at Linklaters law firm, said: “The concern at the ECB is that euro area financial instruments should only be cleared if there is the backing of the central bank. That would mean the relevant clearing house being headquartered in the eurozone.”

The UK is changing its rules so that clearing houses will have access to central bank liquidity, he added, but the Bank of England would need to be able to provide large quantities of euro-denominated liquidity, not just sterling, to meet the ECB concern.

John Springford, a senior research fellow at the Centre for European Reform, said he disagreed with accusations by some UK commentators that the euro area’s policy on clearing houses amounted to regulatory protectionism aimed at winning business from London. “Clearing houses are increasingly important bearers of risk,” Mr Springford said. “The ECB is saying that if we are going to provide liquidity to these clearing houses we want to supervise them.”

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