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10 July 2020

FT: Brussels moves to preserve access to London clearing houses

EU financial policy commissioner says decision will address risks to financial stability posed by Brexit

Brussels is to adopt emergency measures to preserve Europe’s access to crucial UK financial market infrastructure after the country’s post-Brexit transition period expires, the bloc’s regulation chief said on Thursday. Valdis Dombrovskis, the European Commission’s executive vice-president in charge of financial policy, said Brussels would adopt “time-limited” access rights to make sure that European companies could still access UK-based clearing houses after the end of this year.

“This decision is being taken to address the possible risks to financial stability related to the specific area of derivatives clearing,” Mr Dombrovskis said. “However, we would encourage all market participants to prepare for all possible eventualities, as we have consistently called on them to do throughout this process.” Mr Dombrovskis did not specify when the access rights would expire, but the move will provide short-term certainty for traders in the specific area of clearing while Brussels continues to discuss future relations with the UK.

The step would apply whether or not Britain and the EU succeed in their negotiations on a trade and broader future-relationship deal. In the future, financial market access between the EU and UK will be determined through a process known as “equivalence”, whereby Britain and Brussels assess whether each other has sufficiently tough regulation and supervision of the sector. The EU is preparing legislation to toughen its rules for oversight of UK clearing houses.

About 40 equivalence provisions are scattered across different EU financial regulations. They cover everything from credit rating agencies to swaps trading platforms. Access rights are overseen by Brussels and can be withdrawn at short notice. London dominates the European market for swaps and futures clearing, handling the bulk of the €735tn market, and Europe has few alternative venues to cope with the volume of business. UK clearing houses LCH, ICE Clear Europe and LME Clear are among the most critical institutions in the financial system, and prevent defaults from ricocheting through the rest of the market.

Brussels’ move mirrors steps it took last year, when fears were rife of the UK crashing out of the bloc without a deal. The Bank of England and the European Central Bank agreed in 2018 that derivatives clearing was the one area where a breakdown in trading links would threaten financial stability. The EU has now judged that action is needed to smooth the consequences of the end of the UK’s transition period on December 31, when Britain will exit the single market even if the two sides strike a trade deal....

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