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After Brexit, Brussels granted its banks temporary access to London’s clearing houses, with this being extended for three years at the start of 2022. Despite warnings that the UK leaving the bloc would risk hurting Britain’s finances, it now seems that bankers on the continent are fearful of their own political leaders scrapping a vital trade link on which they continue to depend. Clearing houses are a cornerstone of financial trade, facilitating payments, securities and derivatives. Though the extension brought temporary breathing space for key players on the continent, fears remain about what will happen if and when the link is permanently severed.
If it had expired this year we were in no way ready,” said Susan Yavari, Regulatory Policy Advisor for Capital Markets at the European Fund and Asset Management Association.
The bulk of Europe’s €660 trillion (£557.18tr) clearing market is handled in the City of London, but Brussels has shown an increasing desire to build up its own capacity.
While announcing the 2025 extension, EU Financial Services Commissioner Mairead McGuinness insisted there would be no further extensions, along with announcing a consultation into boosting the EU’s competitiveness in clearing.
But Ms Yavari said there was a desire to see recognition and equivalence beyond 2025.
She explained: “We want to be able to preserve choice, so wherever the Commission land on this we want to ensure that we’re still able to access CCPs, and I’m sure the offering will continue to improve and become broader, but equally we want to be able to access London for clearing purposes.”
The EU is particularly concerned about what Ms McGuinness has described as “excessive dependence” on London with a long term aim of building clearing capacity in financial centres such as Paris and Frankfurt.
Ms Yavari said: “We do understand there is some systemic risk with the amount of clearing that goes on currently with UK CCPs, so to the extent that the EU would like to see some reduction in that, we can understand that, but we think this is something that needs to take place organically and not the result of some sort of regulation that disallows access to UK CCPs.”
The hard deadline of 2025 has also sparked confusion in the UK, with Bank of England Governor Andrew Bailey saying there was no need for a time limit and warning Brussels against “seeking to fragment the international system”.
Despite the EU’s efforts banks have so far proved reluctant to change their clearing habits leading to increased frustration from Ms McGuinness who has warned: “It will not happen organically, which is why we will need to intervene.”
Ms Yavari however insisted the “prudent approach is allowing business to do it organically over time”, adding that “expansion of clearing capacity should not be pursued through regulatory measures.”
EU regulator The European Securities and Markets Authority (ESMA) has previously warned of the risks of cutting access to London, describing the City’s clearing houses as of “substantial systemic importance.
Shortly before the 2025 extension was given the ESMA warned it would cost EU customers around €71 million (£59.99m) to transfer from positions with the London Stock Exchange Group over a two year period, with the costs put at €824 million (£696.26m) if there was no transition.
Ms Yavari warned that the EU’s “policy response shouldn’t go so far as to cut off competition”.
“If you’re bringing clearing volume of CCPs not driven by actual quality of the offering, you’re not making it globally competitive,” she added.
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Even with a three-year transition period there is concern the EU will be unable to build up sufficient capacity of its own, leaving EU firms with less options compared to other countries able to access London’s markets.
Ms Yavari said: “We would feel at a disadvantage to non-EU funds who have that clearing choice.”
Cut off from London and without a sufficient offering within the EU, banks could simply be driven elsewhere.
One option for European firms would be New York which also has a well established clearing house market, and crucially has EU equivalence.
“If what they do is not extend equivalence to UK CCPs then businesses could very well go to the US” warned Ms Yavari.
She concluded: “What you don’t want to see post-Brexit is this sort of urge to build walls and end up adopting a protectionist approach.
“That’s just not competitive because we lose out and consumers and savers ultimately lose out.”
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