The EU has been trying to gain control over clearing for years but the outcome may still be murky. Lynn Strongin Dodds looks at the latest chapter.
EU clearing was a bone of contention between London and Brussels long before the UK decided to leave the European Union. It started in 2010 but the UK’s clean break with the bloc six years later gave officials the opportunity they had been waiting for. However, wresting control from London could take many years.
In fact, on 7 February EU officials pedalled back on proposals to force a certain percentage of trades to be cleared in the region.
They were first introduced by the European Council and Parliament two years ago under European Market Infrastructure Regulation (EMIR). The recent version provides more clarity and definition as to what constitutes an active account requirement. Simply put it obliges banks and asset managers to have an account with an EU-based clearinghouse to clear contracts such as euro interest rate swaps (IRS). In addition, they have to demonstrate their activity, for “counterparties above a certain threshold to clear trades in the most relevant sub-categories of derivatives of substantial systemic importance.”
Regulators have also set the minimum threshold at five trades for each relevant category, although this could depend on the value of deals done. Estimates are that it would result in a maximum of 900 trades per year which marks a significant climbdown for Brussels, which would have liked to have seen a greater number of trades. Although the Commission will receive a progress report after two years, EU financial services chief Mairead McGuinness That being said,” I would have preferred a higher ambition regarding the active account. The agreement is nevertheless a crucial first step to boost clearing in the EU and to allow our work on the capital markets union to progress”. (the above is the same link as para 2).
Not everyone in Europe is a proponent of the regulators’ intentions. In a joint statement last year, funds and derivatives industry bodies. EFAMA, ICI Global and AIMA, derivatives sector bodies FIA and ISDA, along with the Federation of the Dutch Pension Funds, the Finance Denmark Association and the Nordic Securities Association voices their opposition. They said that the proposed active account requirement would negatively impact EU capital markets by introducing fragmentation and loss of netting benefits, and make the EU less resilient to market stresses, with no benefit to EU financial stability.”
For now, Deutsche Boerse and Swiss SIX Group’s Madrid Exchange are vying for a piece of the action but so too is Nasdaq Europe. At the beginning of the year, the exchange announced it planned to will expand derivatives clearing to include euro interest rate swaps (IRS) in the coming months.
In 2023 the market share in clearing euro interest-based swap based on Euribor was 95.4% at LCH, and 4.6% at Deutsche Börse’s Eurex, according to a blog from Clarus Financial, the derivatives analytics provider. The blog also noted that “the gain in share at Eurex in 2020 and 2021 has reversed in 2022 and 2023.”
The EU clearing saga began in 2011 during the eurozone debt crisis, when the European Central Bank (ECB) warned that a financial, legal or operational problem at a clearinghouse could have knock-on impacts for the euro. It issued a so-called location policy requiring clearinghouses to be based in the eurozone if they handle over 5% of the market in a euro-denominated financial product.
In response, Britain filed two lawsuits to stop the action that would force clearers like London-based LCH.Clearnet to relocate to the euro zone. It took four years, but the European Court of Justice concluded that the central bank did not have the power to regulate securities clearing. Ironically since Brexit, the euro repo and government-bonds business that fuelled its worries has relocated to LCH’s Paris unit.
In addition, the European Securities and Markets Authority (ESMA) has been given the power to request information and even inspect the premises of clearinghouses that are critically important to the EU’s financial system — including London’s LCH and ICE Clear Europe.
There is no doubt that this narrative will continue its long run.
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