LONDON (Reuters) – The EU wants to end its financial sector’s dependence on British clearing houses for derivatives business.
In the future, banks and other market participants will have to prove to the regulatory authorities that they are not overly dependent on London clearing companies when processing derivatives transactions, according to a draft law by the EU Commission that the Reuters news agency was able to see. According to this, market participants will have to maintain an active account with a clearing house in the EU with a minimum level of activity that has yet to be determined. New regulations have become necessary as a result of the UK leaving the EU. Previous transitional regulations expire on June 30, 2025.
So far, even after Brexit, British clearing houses such as the clearing house LCH, which belongs to the London Stock Exchange LSE, have continued to dominate the business with the settlement of financial derivatives denominated in euros. Clearing houses assume an important pivotal function in the financial sector: they take care of the settlement and settlement of securities transactions and stand between seller and buyer. They are protected by a default fund. This is to ensure that transactions are processed even if one side should go bankrupt.
It is appropriate to require counterparties, both financial and non-financial, to maintain, directly or indirectly, accounts with a minimum level of activity with clearing houses located in the EU, the draft law says. The required minimum level of activity is to be determined by the EU stock exchange supervisory authority ESMA and other supervisory authorities in the EU.
According to the draft, the move aims, among other things, to protect financial stability. Excessive exposure to a few non-EU clearing houses should be put under control. “Furthermore, ESMA should indicate appropriate phasing-in periods for the gradual implementation of this requirement,” the draft continues. Public consultations are planned on the planned regulation. In addition, ESMA should prepare a cost-benefit analysis. The plan so far is that the draft law will be published on December 7th. The EU Parliament and the member states still have to approve the regulations.
Large international banking groups had warned the EU against being too harsh on regulation. Too strict regulations could prove harmful for banks in the EU. Because these are dependent on access to global liquidity pools in London. Too harsh an approach could also lead to clearing transactions migrating to the United States, it had been said.
(Report by Huw Jones; Edited by Frank Siebelt; Edited by Olaf Brenner; If you have any questions, please contact our editorial team at [email protected] (for politics and the economy) or [email protected] (for companies and markets).)