20 October 2021

FT: Brussels vows ‘no cliff edge’ over EU banks’ access to UK clearing

The EU’s financial services chief has pledged to avoid market instability or a “cliff edge” over a decision on European banks’ ability to access UK clearing houses, comments that will raise investors’ expectations that Brussels is preparing an extension to its temporary permit.

Mairead McGuinness said the European Commission would not engage in “any sudden twists and turns” on a decision over the licence that allows European banks to clear deals worth billions in London until the middle of next year.

A decision on the matter could come within weeks, she said. However, the Irish commissioner also urged market participants to take seriously the commission’s demand that more euro-denominated derivatives business move to the EU over the longer term, following the UK’s decision to quit the single market. “We have to make sure that there is no instability in the short-term, but we also have to look at our long-term interests,” McGuinness said in an interview with the Financial Times.

“They should read my lips and hear what I am saying. We do view this as a strategic issue for us in the medium, long term.” European and US banks and asset managers have been urging the commission to again extend its “equivalence” decision for access to UK clearing houses beyond next June given the huge amount of liquidity in the City of London market. Last month they called on the EU for a “longer-term approach” to the issue, to give the market more time to prepare.

The commission, however, wants to see business shifted back to the EU because it is unhappy about the financial stability risks of seeing up to €80tn of open contracts being handled in a market that is no longer subject to its direct oversight. Clearing houses sit between deals and prevent defaults from ricocheting through the rest of the market. The problem for the commission is that there has been little sign of any shift in business towards EU financial capitals since the UK’s exit from the single market at the start of the year. London’s LCH still handles about 90 per cent of all euro-denominated derivatives, according to data provider Osttra....

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