EU sticks with post-Brexit clearing trade deadline despite objections

Brussels has rebuffed industry calls to rethink its plan for grabbing lucrative clearing business from the City of London, saying it needs to proceed to ensure robust markets in Europe. 

Mairead McGuinness, the financial services commissioner, defended the EU strategy to build up euro-denominated clearing, saying this proposal was vital to the bloc’s “financial resilience”. 

The commission faces mounting pressure from leading derivatives houses to rethink EU plans to wrest euro-denominated clearing from London. McGuinness was speaking to the Financial Times after two days of meetings in London, where she held talks with counterparts on boosting collaboration in other areas of financial services.

Clearing houses cut market risk by standing between two parties in a trade. They have been a big battleground since Brexit, as the EU seeks to build up its capital markets infrastructure and improve its regulators’ oversight of the vast euro-denominated derivatives market. 

Clearing is the only area where the EU has granted London temporary “equivalence” since Brexit, allowing the City’s clearing powerhouse to continue handling euro-denominated swaps trades that stand at more than €130tn. The EU plan sets June 30 2025 as the cut-off date for its “equivalence” decision, but industry players are warning this represents a threat to financial stability. 

The UK government privately believes that the commission will have to — inevitably — delay the end-date by several years. British government officials said UK ministers expected the EU to extend CCP equivalence further “out of self-interest”, given that letting the current equivalence expire could create “financial stability risk” for the continent. 

A further extension of the deadline would not only benefit the EU after the takeover of Credit Suisse and several US bank failures but would also reflect improving relations between London and Brussels, they argued.

But McGuinness said the EU’s date was aimed at ensuring no “cliff-edge” faced the industry and that it gave the EU time to put its house in order.

“I want to underline that this matter is actually not so much about Brexit. The EU needs — for its own sake — safe, robust and attractive clearing for a well-functioning [capital markets union],” McGuinness said.

Wider decisions on equivalence, she added, “will be based on what is in the best interest of the EU, our citizens and businesses, and our financial system”.

McGuinness met top policymakers in London, including Bank of England governor Andrew Bailey and chancellor Jeremy Hunt, in her first official visit to the UK since the Windsor framework was agreed.

She hailed the improved atmosphere in talks, saying relations are “much improved. Tensions have eased.” The two sides did not dwell on clearing houses in the meetings.

Brussels said last week it would sign up to a deal with the UK to boost co-operation in regulating financial services, in a further sign of the improved mood. A new memorandum of understanding will provide a framework for co-operation in financial services, she said, allowing the EU to engage with the UK as it already does with the US and other financial powers.

A new body will meet to discuss common issues such as sustainable finance and financial crime, McGuinness said. She added that collaboration could also be deepened with UK authorities in cryptocurrencies and sustainable finance.

“Over time, a lot will depend on whether the EU and UK move broadly in the same direction when it comes to the regulation and supervision of the financial system.”