EU plans to funnel derivatives trades through its own markets are unlikely to wrest a significant slice of the lucrative clearing business away from the City of London after a climbdown by the bloc’s lawmakers, according to analysts and people involved in the negotiations.
The business of validating financial transactions has become a political battleground since the UK’s 2016 vote to leave the EU, as the bloc seeks to chip away at London’s overwhelming dominance in euro-denominated derivatives clearing and bolster the resilience of its own financial markets.
But rules agreed last week, following years of wrangling, are widely seen as Brussels backing down from earlier ambitions for a more substantial land grab, after being undermined by Franco-German tensions and a backlash from the finance industry.
The deal “is relatively soft and is not going to lead to a significant shift in activity” out of London, said William Wright, founder of think-tank New Financial. In terms of addressing financial stability concerns, the EU “can just about claim that this achieves that”, he added.
Clearing houses are a low-profile but vital piece of financial market plumbing. By standing between a buyer and seller in a trade, they are designed to cut risk by stopping defaults cascading through the system.
London — Europe’s pre-eminent financial centre — has long dominated the business, with its large clearing house, London Stock Exchange Group’s LCH, able to enjoy economies of scale, which helps attract customers.
Even in euro-denominated derivatives, a market totalling €172tn last, year according to Clarus Financial Technology, LCH handles more than 90 per cent of trades. LCH estimates that about 30 per cent of its business in this market comes from the EU.
Under the new rules, EU-based banks and other financial institutions must open so-called active accounts at a clearing house in the bloc, which will handle categories of derivatives that regulators consider systemic.
The minimum threshold of trades that must be cleared through the EU will be set at five trades for each relevant category of derivative, and also depend on the value of deals done, which could result in as many as 900 trades per year, according to officials.
Firms trading more than €100bn annually will have to fulfil that quota every six months, while firms trading €6bn to €100bn must do so every month, the people said. Those pushing for more clearing to be done in the EU had hoped for more trades to be routed through the bloc.
“It’s a bit of a disappointment really,” said one person involved in the negotiations, of the agreed levels. “The expectation is not really that high that this could actually make a difference.”
Previous proposals had included percentage thresholds of trades that should be cleared through the EU, but such measures were dropped.
The agreement is “not as ambitious as we wanted, that’s very clear”, said a senior EU official.
Ambitions for a clearing land-grab date back to the Brexit referendum. Just days after the 2016 vote, then-French president François Hollande said the City of London should no longer have been able to clear euro-denominated trades.
However, the French position has changed markedly, creating tensions with Germany. That follows pressure from French banks and asset managers, while some believe another factor was the likelihood that Germany’s Deutsche Börse, which owns the Eurex clearing house, would be the main winner of clearing business moving to the bloc.
Markus Ferber, a German member of the European parliament, accused France of torpedoing a more far-reaching deal by serving the interests of its banking lobby, who worried about the potential higher costs of shifting clearing away from London.
“I’m really disappointed,” he said, adding that the deal “is a missed opportunity to strengthen our clearing houses, strengthen our systems.
“The French government in particular has once again not thought in the European interest, but has shown itself to be the best ally of the major US banks.”
One person involved in the discussions said France was “more interested in avoiding” a shift in clearing activity to Frankfurt than in bringing it to the EU.
The French finance ministry did not respond to a request for comment.
Clearing is the only area where the EU has granted London temporary regulatory “equivalence” since Brexit, lasting until June 2025, allowing the City’s clearing powerhouse to continue handling euro-denominated derivatives trades.
EU financial services commissioner Mairead McGuinness has pledged not to extend access after then, but market participants believe access will continue to be granted.
“It’s very unlikely” that equivalence will not be extended, said a person close to Europe’s clearing houses, adding “it’d be extremely expensive” for banks to move their trades to the bloc.
Banks, asset managers and brokers had fervently objected to forcing clearing away from London, arguing that separation would raise their costs and make them less competitive, but have welcomed the new rules, which are less onerous than they feared.
“We’re really quite happy,” said Susan Yavari, senior regulatory policy adviser at the European Fund and Asset Management Association, whose members were worried by plans for higher volumes to be sent to EU clearing houses. She added: “We’ve landed in as good a place as we could expect given that this was so much a political decision ultimately.”
LSEG welcomed the proposals, but added that EU firms were still concerned about the need to open accounts in the bloc.
Ian White, analyst at Autonomous Research, said the EU had “stopped short” of forcing trades through the bloc, adding: “This might be quite a good win for London and maybe starts to present some stability for market participants who like using London.”
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