The European Union will allow clearing houses in the UK to continue serving customers in the bloc for a further three years, but officials said it would be the final extension.
The move comes as permission for European banks to continue using Britain’s clearing houses was set to expire on June 30. Temporary market access for UK clearers, known as equivalence, was also due to expire on the same date.
Since Britain fully left the EU in December, clearing euro derivatives has become a Brexit battle as Brussels seeks to build up the bloc’s own capital market and end reliance on London.
The City is pre-eminent in FX and OTC derivatives, which are used by investors to hedge their portfolios, but market participants are concerned that the Brexit deal will cause disruption in the cross-border derivatives market.
The move also comes as a relief to UK clearinghouses as they must decide whether to shift derivatives trades worth billions of euros from Britain. For instance, LCH, the LSE-controlled clearing house that processes around 90 percent of euro-denominated derivatives, is now outside the bloc’s legal system. The LSE said its pan-European platform Turquoise would shift trading in shares of companies based in the bloc to its new Dutch hub if it loses access to the single market.
It’s clearly the end of the road
Without such an arrangement, clearing houses may not get some regulatory approvals, leading to operational problems such as European banks facing much higher capital charges when they use it to process their trades.
The European regulators will make sure that important clearing houses apply the bloc’s regulations and stick to policies applied by the European Central Bank.
EU financial services commissioner Mairead McGuinness said she will also “propose measures to reduce excessive dependence on major clearers based outside the bloc and to improve the attractiveness of EU-based clearers while enhancing their supervision as volumes increase.”
“It’s clearly the end of the road, there will be no extension after those three years,” the EU official added.
Around £440 billion of euro-denominated trade passes through Britain’s clearinghouses everyday thanks to so-called ‘passporting’ rules which allowed them to sell their services freely across the rest of the EU and also give firms based in Europe access to Britain.
European investors were worried about being cut off from Britain’s financial markets because all the other financial centers in Europe are smaller in size. In turn, the UK’s financial services sector is struggling to find a way to preserve the existing flow of trading after the nation left the EU.