EU clearing rules are a quiet win for London

Peter is taking a well deserved break this week — along with half the rest of the UK it seems — so you’ve got me, and this week I’m going to be digging into the EU’s new clearing rules.

While Brexit continues to take up a disproportionate amount of time for UK financial regulators, it has long since faded from the international scene. Major meetings of global financial policymakers can go by with just a passing reference to the topic. 

Last week, though, marked an exception, as the EU and UK made major strides on the thorny area of clearing.

If the term ‘clearing’ has you scratching your head, you’d have been in good company among the UK’s MPs and the EU’s MEPs a decade or so ago. Now, though, they are all experts on the part of the financial industry plumbing that guarantees trades go through as they are intended. 

The reason for clearing’s entry into the general political lexicon is that the vast majority of the clearing of euro denominated interest rate swaps is done through London’s financial centre. 

Which was fine when London was part of the EU, but which European politicians argue is very definitely not fine now the UK is out of the common market. 

Or, as the EU’s financial services commissioner Mairead McGuinness put it in a 2022 speech: “Being heavily dependent on a third country for clearing is unprecedented and it is not sustainable in the medium term.” 

The EU needs clearing houses that will serve it “in all circumstances, not just in fair weather”, McGuinness added somewhat obtusely. 

Privately, politicians fretted about things like a London-based clearing house making trading in eurozone sovereign debt more costly during a crisis in a way that would threaten the EU’s financial stability. 

A mid-2022 deadline was originally set for the Herculean task of moving trillions of euros worth of trading activity from London to the EU, later extended to mid-2025 to give trading firms and their clients enough opportunity to avoid the cliff edge effect of having to move vast amounts of trades in a short time. 

Increased risks

Industry participants, including some of Europe’s biggest banks, argued that the extension wasn’t long enough, and that the project was ultimately an act of self-harm since big liquid markets are crucial for trading to work well, and splitting Europe’s clearing between London and Frankfurt would increase risk. 

Which brings us to last week, when the EU announced new long-term provisions on how the bloc’s traders can engage with the UK’s clearing houses. Under the proposals, most EU trading entities must have ‘active accounts’ at EU-based clearing houses that could, at short notice, assume clearing done outside the EU. EU traders above a certain size must also clear a small number of their trades inside the EU in peace times. 

The EU’s securities watchdog Esma will also be given more oversight of non-EU clearing, through “information sharing” from non-EU supervisors, and Esma will assume a “co-ordination role in emergency situations”, the EU said. 

“For now, it deals with the core of the issue that people are worried about,” says Chris Woolard, who leads EY’s global regulatory network and is the former head of the UK’s Financial Conduct Authority.

“It also gives a very pragmatic signal that while a relatively small amount of this must be done within Europe, UK [clearing] markets are still accessible for European-based funds”. 

Days after the original announcement, the EU released the final text of the regulation and corresponding directive that will underpin the changes, giving experts hundreds of pages of detail to pore over.   

Privately, British officials, European banks, and lobbyists say the outcome looks like a win for the UK, which wants to retain as much financial services activity as it can, and the financial sector, which wants maximum access to what it sees as the most efficient venue. 

“While no bank in the UK or on the continent would go public, my personal view is (that) what we get is the best we could hope for, as a delicate balance between repatriation of clearing but not fragmenting the liquidity pool,” says one lobbyist. 

The cliff edge of July 2025 looks likely to be avoided because equivalence can more easily be extended since the EU has mitigated the danger to financial stability in another way. 

Reactions so far are mostly caveated with ‘likely’ and ‘probably’ because there is so much to work out and digest. 

“The agreement is a complex one for operators as well as NCAs [national competent authorities] and Esma,” said Sebastien de Brouwer, chief policy officer at the European Banking Federation. 

“Therefore, time is needed to iron out the details, set up new processes. We need to see how the market will react.”

A second lobbyist said that even if the detail is as favourable as it looks, the industry will not celebrate publicly because “no one wants to upset anyone . . . it’s a very delicate field”. 

Think-tanks, however, seem less worried about upsetting the apple cart. 

“This is face saving for their stupidity,” says Karel Lannoo, chief executive of the Centre for European Policy Studies, arguing that the EU’s aspiration to move clearing from the UK was a “waste of time and energy” and that numerous studies had shown the plan would fail. 

“LCH (London Clearing House) is the tip of the iceberg . . . you can only have a clearing business if you have the rest of the iceberg,” he adds, pointing to the legal expertise, supervision, common law and other attributes underpinning London’s clearing infrastructure. 

While the UK was not a party to the clearing developments, it has recently extended the post-Brexit hand of friendship to EU funds selling into the UK by offering them long-term access to the UK’s market. 

“Openness is one of the reasons why the UK has been seen as being a dominant force in the financial services industry,” says Steven Burrows, a lawyer at Fieldfisher in London, arguing that the UK would continue to play nice, even if the EU had been more forceful on clearing. “For the UK to all of a sudden be more protectionist is not really in keeping with the UK regulatory style or culture.”

Brexit in numbers

We are now four years-plus into Brexit, so it’s as good a time as any to conduct a stock take of what’s actually happened to all those financial regulations we inherited from the EU. 

The answer is — mostly — that changes are still a work in progress. 

The UK has said it will repeal 777 retained EU laws in the arena of financial regulation. So far, just 150 of these have actually been repealed. Another 194 are marked as “repeal commenced” under 2023’s Financial Services & Markets Act, while the remaining 433 are marked as “unchanged” in the government’s latest update but are ultimately due to be repealed under the act. 

“Brexit offers the UK a chance to rewrite financial services regulation,” says Simon Morris, a financial services partner with law firm CMS. “But it won’t do so in any truly significant way for several reasons. First, industry doesn’t want extra upheaval when dealing with challenges on climate, digitalisation, and resilience. Also, being different for no good reason is purposeless.”

“But changes will happen where industry can show that it will boost UK plc.” He offers as examples October’s decision to remove a cap on bankers’ bonuses, and changes to insurers’ capital rules that freed up investment. 

“Beyond that reforms to help struggling UK capital markets are taking time, with further technical consultations on the UK’s listing regime and investment research rules still ongoing or yet to be launched,” Morris adds. 

The banker bonuses changes, incidentally, were done by financial regulators directly, through changes to their rule book, rather than through primary law, so they don’t count towards the repeal tally. 

Britain after Brexit is edited by Gordon Smith. Premium subscribers can sign up here to have it delivered straight to their inbox every Thursday afternoon. Or you can take out a Premium subscription here. Read earlier editions of the newsletter here.