The EU is coming under increasing pressure from Europe’s biggest derivatives houses to radically rethink its plans to wrest euro compensation from the City of London.
Compensation houses – which reduce market risk by placing themselves between two parties in a trade – have been a key battleground ever since Brexitwith the EU intending to shift customs clearance of strategically important European trades to the continent as soon as possible.
The latest deadline, which the EU has promised will be the final limit, is June 2025. But finance chiefs have warned of the serious risk to financial stability that the Brussels project poses.
Europe’s largest derivatives firms, including BNP Paribas, Deutsche Bank and Société Générale, vehemently oppose the EU plans, fearing additional costs and less efficient clearing, while London-based clearing house LCH, which also risks of losing lucrative business, he pushed for a rethink.
Banks, LCHs and their lobby groups have stepped up efforts to overturn the European Commission’s plans in recent weeks, warning that Brussels’ proposals to bring the business onshore are not feasible and could wreak havoc on European markets.
“Officials are involved at the highest level on both sides as this is a financial stability issue for the EU/Eurozone and it is also an existential issue for the city,” said one person involved in the talks, who said asked not to be named as the discussions were sensitive.
Lobbying efforts led by the International Swaps and Derivatives Association focus on the details of EU plans to force firms to route a yet-to-be-determined percentage of some euro-denominated trades through EU clearinghouses starting in mid of 2025.
ISDA said the proposals as they stood were so impractical that they could “have the unintended outcome of deterring market participants from clearing transactions”, which would increase risk in the markets.
The European Banking Federation lobby group released a position paper in recent weeks, warning MEPs and EU member states that Europe’s current plans ‘may lead to unforeseen and largely negative effects on competitiveness, resilience and the attractiveness of European financial markets and their financial institutions”.
Clearing is the only area where the EU has granted London temporary ‘equivalence’ in the aftermath of Brexit, allowing the City’s clearinghouse to continue handling euro-denominated swap transactions which stood at €133 trillion euros at the close on Friday.
Extending equivalence further is politically difficult. EU Financial Services Commissioner Mairead McGuinness insisted June 2025 is the final cut.
But serious doubts have emerged about the practicalities of implementing the plan, unveiled last December, and concerns about financial stability have risen to the global political agenda after the implosion of a group of US banks and the collapse of Credit Suisse .
People familiar with the EU’s position said Brussels has no plans to prolong it now and that any changes will fall to the next commission, which takes over at the end of 2024.
The commission said its decision last February to extend equivalence for UK clearing houses “ensures the financial stability of the EU in the short term. There are currently no plans to change this decision.”
“There is an inconsistency between the message at a political level and the reality on the ground,” another person involved in the industry discussions told the Financial Times. “We almost assume that the equivalence will be extended.”
Some EU officials said the extension could be an upfront reward for improved relations between the two sides after the Windsor framework, overseen by British Prime Minister Rishi Sunak, resolved the thorny issue of trade between Ireland of the North and the EU after Brexit.
“If I were Rishi Sunak, I would be pushing hard for this,” an EU official said. “There is nothing concrete, but the atmosphere is very positive.”
British officials also suspect the EU may extend the 2025 date, but mostly because the bloc’s financial services sector needs London and is eager to avoid massive relocations.
“There could be a lot of games about who is the real winner in all of this,” said a UK government official, arguing it could be in the EU’s interest to suggest it’s doing the UK a favour. “But we haven’t had any discussions about that.”
LCH declined to comment on any specific talks but said: “We will continue to engage and cooperate with relevant regulators regarding the long-term recognition of LCH Limited on an ongoing basis.”
Deutsche Bank, BNP Paribas and Société Générale declined to comment.
McGuinness is expected to visit London this month and discuss, among other things, a new memorandum of understanding on financial services, intended to create a debate to resolve differences between the two sides.
Research by Acuiti, a derivatives market intelligence provider, found on Thursday that 8% of market participants supported the EU compensation plans and a majority feared it would drive up costs. Most wanted clarity from the EU on its plans, he added.
“There’s a need for clarity because you can’t get membership in a few months,” said William Mitting, chief executive officer of Acuiti. “There’s a lot of investment and it’s a long process.”
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