Financial Times: The EU’s plan to shift clearing out of London risks disaster

14 March 2018

Splitting supervision of euro clearing between ESMA, the ECB and national authorities after Brexit threatens stability, writes CEPS' Karel Lanoo.

[...] Its plans for supervising clearing houses are flawed and do not seem to appreciate the volume of business disruption that will surely take place after the UK leaves the EU.

[...]now that Brexit is looming, the European Commission wants a new supervisory solution for euro-denominated derivatives. It has proposed bringing all non-EU business under the supervision of the European Securities and Markets Authority (Esma), the regional watchdog.

Third country clearing houses — but not those in the EU — would have to seek recognition from Esma. It would then have the power to inspect and fine them and could eventually force them to relocate to the eurozone.

Separately, the European Central Bank is also trying to jump in, proposing a change to its statutes to give it supervisory authority over clearing houses too.

But the EU is making a mistake and underestimating the potential turmoil this shift could cause. The Brussels plan does not pass supervision of local clearing houses to Esma — instead national authorities would continue to do their licensing.

That means any business that migrates from London to the EU27 would be less centrally supervised than it was before. Systemically important clearing houses might well be split up among several different national and European watchdogs that would lack both expertise in the sector and a complete picture of what was going on.

Furthermore, all this uncertainty about what will happen to derivatives contracts involving UK-based entities after Brexit could be very disruptive. If the EU and the UK refuse to recognise each other’s regulatory systems — a process known as equivalence — then UK futures houses will have to open subsidiaries in the EU27, driving up costs and reducing efficiencies.

The UK isn’t the only country concerned about the EU’s clearing proposals. US officials are worried that the rule changes could also allow Esma and the ECB to exercise authority over American futures traders. If the fight spreads, the US and EU might tear up their current equivalence agreements, leading to another possible source of disruption in this critical market.

Market participants and regulators alike agree that CCPs have become more central to the global financial system since the crisis and therefore require close supervision.

But the EU’s proposal for handling the departure of the UK, however, does not live up to that expectation.

Rather than creating an integrated EU solution; it looks rather like a halfway house that is trying to keep too many entities under its roof — the ECB, Esma and the national authorities.

The plan will leave the market and its supervisors dangerously fragmented, while creating uncertainty for the many European and UK companies that rely on futures to hedge their risks. It is time to stop playing politics with euro clearing and come up with a workable solution. [...]

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