10 May 2017

130th Brussels 4 Breakfast Notes: The Brexit talks - temperature rising, clearing end-game!

The EU27 leaders agreed their red lines for the upcoming Brexit negotiations while PM May announced a snap election and called for a strong mandate to secure a good deal. But the election won't change talks one bit, the EU warned, and Brussels is closing in on London euro-clearing business.

Paula Martín/Graham Bishop

Organised by the Centre for the Study of Financial Innovation (CSFI), hosted by Grant Thornton with co-presentersDenis MacShane (Avisa Partners)and Bob Penn (Cleary Gottlieb Steen & Hamilton)

Highlights from the “Brussels for Breakfast” meeting

As the meeting fell on Europe Day, I suggested we follow President Macron’s lead and hum Ode to Joy but this was not well-received by the Chairman! However, the implications of President Macron caused much discussion but perhaps not much light was shed. The full significance for European integration will hinge on his party’s performance in the Parliamentary elections in the next five weeks. However, as a straw in the wind, it was reported that the French Commercial Court is preparing to act in English where necessary!

The significance of the 28 Paragraph negotiating guidelines agreed by the European Council in four minutes triggered a substantial debate as the details go far beyond the reporting in the UK media. The demands for EU citizens’ rights in the UK go far beyond simple residence and enforcement may turn out to be a key sticking point. Barnier’s negotiating directives only run to the first phase of the negotiation so he will not be empowered to go any further no matter what the UK pressure.

The alleged `power grab’ by the EU27 over derivatives clearing turned into a controversial topic. ESMA’s work-plan on out-sourcing and delegation illustrates that EU27 will take a tough line on “brass plate” operations and the end-game on CCPs is perhaps coming into sight. Commissioner Dombrovskis laid out two basic choices: enhanced supervision or CCPs will be “asked” to re-locate. The request for “enhanced supervision” even after the ECB/BoE agreement on information exchange etc. suggests that agreement is insufficient. The idea of just “asking” CCPs to relocate illustrates the many routes for EU27 to pressure the UK without Treaty (or even Directive/Regulation) change.

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Key items in the rest of the month’s news included:

The EU27 leaders held a surprisingly short debate of just 4 minutes – a promptness that was used by Council President Tusk to underline the "outstanding unity” of the remaining EU members - in which the European Council guidelines for the Brexit negotiations were agreed. The red lines drawn in Europe for the Brexit talks will be: orderly withdrawal first, trade talks only after that; EU and UK citizens’ rights across Europe must be safeguarded; “flexible and imaginative solutions will be required” to prevent a hard border in Northern Ireland, possibly including a united Ireland brought about in accordance with the Good Friday Agreement; and no place for a sector-by-sector or multi-lateral approach – the Union will negotiate with a single, “transparent” voice, as the top EU Brexit negotiator remarked. Michel Barnier stated that the financial settlement of the divorce agreement “should cover all commitments as well as liabilities, including contingent liabilities,” as agreed in the document. Barnier doesn’t want the UK to see the debts and payments arrangement as a “punishment” or a “Brexit bill”, but warned that negotiations will be long and tough.

As an appetizer to that seemingly tortuous journey, the preliminary talks might have already started on the wrong foot. EU officials and leaders seem to have opted for a hard-line stance, in a bid to convince the rest of the countries with serious options of calling a referendum on their EU membership that leaving is not a good idea. Angela Merkel warned against ‘illusions’ some officials in London were nurturing  and reminded Britain it can’t expect preferential treatment or keeping privileges as if it was still a member of the EU club, whereas Finland’s Finance Minister said Brexit will be “so painfulthat no one will want to feel it for themselves”.

Theresa May’s equally unexpected announcement of a snap election on June 8^th caught everybody in London and Brussels off-guard, but the Prime Minister’s call for a strong support that would strengthen her hand in the withdrawal arrangements received  a cold response from Parliament chief Brexit broker Guy Verhofstadt, warning that “the election won’t change Brexit one bit.” “What has been billed as a ‘Brexit election’,” said Verhofstadt, “is an attempted power grab by the Tories, who wish to take advantage of a Labour party in seeming disarray to secure another five years of power before the reality of Brexit bites”.

The Financial Times reported on a leaked Commission document on proposed changes to derivative rules that will impose greater control over euro-clearing of derivatives markets from Brussels once Britain has become a third country: either allow EU rules and supervision of relocate to a country within the bloc.  This has been seen as a provocative power grab ahead of the beginning of disconnection talks: the London Stock Exchange said the attempt may backfire and put “only European”  investors and financial firms at risk. [...]

Full article available for consultancy clients here