EU plot to raid £560trillion London market dealt hammerblow – Europe’s banks launch attack

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Jacob Rees-Mogg says EU was ‘very cross’ about Brexit

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Brussels vowed to reduce the EU’s “excessive dependence” on the City and its €660 trillion (£563trillion) clearing market but the European Banking Federation (EBF) has now said the European Commission’s proposal would cause “serious market disruption”.

Clearing houses act as middlemen in derivatives trades between banks. Since the 2008 financial crisis, they are a vital part of the financial system.

The City is Europe’s largest centre for clearing activity, with London Stock Exchange’s LCH unit in London clearing about 90 percent of euro interest rate derivatives.

Brexit made clearing a strong battleground.

In line with Brussels’ desire for control over euro-denominated trades to build “strategic autonomy” in capital markets, after the UK’s departure it insisted EU banks would be shut out of London, with an initial deadline of January 2020.

This was however repeatedly pushed back over concerns about financial stability and reduced access to products such as mortgages.

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Mairead McGuinness

McGuinness, executive EU Commission financial services chief, wants less EU ‘dependence’ on UK (Image: Getty)

In January, Mairead McGuinness, financial services chief at the executive European Commission, was forced to allow EU-based banks and money managers to clear trades in London until June 2025 after failing to persuade banks and their customers to shift the activity from the UK capital to Deutsche Boerse’s Eurex in Frankfurt fast enough.

An abrupt end to cross-border clearing would have disrupted markets, but EU officials believe three years will be long enough to allow the build-up of European capacity to replace the trade.

After Ms McGuinness launched a consultation for measures to lower the EU’s reliance “on systemic third-country clearinghouses and to improve the attractiveness of EU-based clearing houses”, the EBF advised against the “forced relocation” plans.

The consultation paper, a 46-page document, asked for views on possible “negative and positive” incentives.

In its response, the EBF warned international clients “will move their entire capital markets business (not only the clearing business) to non-EU institutions” if the Commission pushed ahead – calling it an “ineffective and counterproductive” take.

Led by Santander chief Ana Botin, the EBF represents 32 national banking associations across the continent and more than 3,500 European banks.

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City of London

City of London: Europe’s largest centre for clearing activity (Image: Getty)

The trade body said: “EBF would like to highlight that any forced relocation strategy or other coercive measures will not achieve, and would likely undermine, the objective of a competitive and resilient EU clearing [market].”

The federation concluded: “We ask the European Commission to only consider measures that make clearing in the EU more attractive, without disproportionally undermining other market participants that are key to the fair and efficient provision of clearing services.”

In a speech at the European Central Bank in Frankfurt on Wednesday, Ms McGuinness, an Irish conservative, compared the EU’s dependence on the City of London with its reliance on Russian oil and gas.

She said: “We do need to watch out for areas where we are vulnerable to decisions made outside the EU, and therefore, beyond our control.

“Energy is the most prominent and urgent example of that vulnerability right now. But we also need to watch for vulnerabilities in capital and financial services.”

Ms McGuinness said she would now propose legislation in October this year, which would include incentives to use clearing houses inside the EU and penalties for using London’s.

Once again alluding to the crisis in Ukraine, she vowed: “It’s time now for Europe, the EU of 27, to make very strong decisions on the financial stability and the financial system, just as we are doing today very critically and very urgently around our over-dependence on energy from Russia.”

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