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Derivatives reforms threaten to realise London's Brexit fears

12 May 2017

EU prepares to repatriate euro clearing business

When it came to disentangling the UK from the European Union, financial services was always going to be a flashpoint. The first shots were fired last week in the guise of reforms to the EU's framework regulation on derivatives – 'EMIR'. Alongside a fairly innocuous legislative proposal, the Commission published a Communication outlining several options for a second proposal in June, which will go to the heart of the question over London's role in the European financial system after Brexit.

Bringing euro clearing home

The issue is over clearing houses – which act as middlemen and guarantors for derivatives trades – and London's dominance of the euro clearing market in particular. Clearing is not a particularly sexy part of the financial sector, but it is important, and lucrative. Many on the continent (most vocally France) believe that an activity that is so crucial to the financial stability of the Eurozone should be based within the single currency area.

The Communication in question is the latest move in a long-running battle, and the controversy centres on a single line, which raises the prospect of "enhanced supervision at EU level and/or location requirements". The ECB attempted to impose such location requirements a few years ago, but the UK won an ECJ ruling to say that the bank did not have the power. The Commission is clearly now considering whether to put the requirements into law.

London hits back

Response from London was swift and unequivocal – Chancellor Philip Hammond said that "We should be careful of any proposals which might disrupt growth, raise the cost of investment in Europe and the UK or weaken financial stability", and the lobby group TheCityUK argued that "A forced re-location of euro clearing would lead to disruption, uncertainty and fragmentation of the market".

The US has even waded into the debate, with Christopher Giancarlo, the acting chairman of the Commodity Futures Trading Commission (CFTC), noting that the US “has not deemed a body of water – even as large as the Atlantic Ocean – as an impediment to effective [clearing house] supervision and examination".

In practice, if the EU decides to go down this route, there will likely be little that the UK can do to stop it. Expect a flurry of debate in the run up to June's proposal.

Alex Boxell, Senior EU Policy Analyst
Alex Boxell
Senior EU Policy Analyst

Alex Boxell is Senior Policy Analyst on the DeHavilland EU team. He first joined the company in 2012, initially in an editorial role before taking over the financial services portfolio. Before this he studied at Oxford and Leiden, where he received a master’s degree in EU Studies.