At the headquarters of the EU Commission, they are hoping for a strengthening of the financial centers within the European Union.
(Photo: imago images/ZUMA Press)
Brussels The EU wants to reduce its dependence on the financial center London. For this reason, companies are to be obliged for the first time to settle part of their derivatives transactions in euros with clearing houses in the EU. This emerges from the draft of the revised EU regulation on market infrastructure (Emir), which is available to the Handelsblatt.
According to the 84-page document, the reform aims to build up clearing capacity in the EU and thus increase liquidity in European clearing houses. The aim is to “reduce the risks to financial stability that arise from over-reliance on clearing houses in third countries”.
The Emir regulation was passed after the 2009 financial crisis to reduce the risks involved in derivatives trading. Since then, central clearing houses have had to process every transaction as intermediaries between buyers and sellers. In doing so, they assume the default risk of the business and increase transparency in the market.
With the reform, the Commission is reacting to the changed situation after Brexit. The majority of euro clearing continues to be handled by the London market leader LCH – and thus outside Brussels’ sphere of influence. EU Finance Commissioner Mairead McGuinness fears that she will not have access to systemically important institutions in the event of a crisis.
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>> Read here: EU Finance Commissioner McGuinness talks about clearing in an interview with the Handelsblatt
According to the draft, in future all market participants will have to keep an active account for certain systemic products with a clearing house in the EU. These include interest rate derivatives in euros and zloty as well as credit default swaps (CDS) and futures in euros. According to the EU Commission, around 60 percent of European clearing users currently have an account for interest rate derivatives with an EU clearing house. Around 85 percent have one for CDS transactions.
Clearing firms are in favor of London
Esma, the Securities and Exchange Commission, is to develop details of the accounts. The agency will also be given new powers to oversee clearing houses to manage the additional risks posed by moving business out of London.
European banks are obliged to inform their customers that they can also process certain contracts with an EU provider. Likewise, all clearing activities in third countries must be reported to the supervisory authority.
The requirements for clearing providers, on the other hand, are to be reduced. According to the draft, the approval procedures for new products are “unnecessarily long and tedious”. This makes it difficult for companies to attract new business from abroad. Therefore, in future they should be allowed to offer certain products without prior authorization. The draft says that the simplification of the processes would reduce costs. Overall, clearing would become “more efficient”.
However, many companies dispute this. They argue that the London location offers the greatest liquidity and therefore the lowest costs. Market fragmentation across Europe, on the other hand, would increase costs for everyone.
For other critics, the reform does not go far enough. “It is questionable whether the new measures alone are sufficient to break London’s supremacy in euro clearing,” said CSU MEP Markus Ferber. When presenting its proposal next week, the Commission must send an “unmistakable signal” to the market “that 2025 will definitely end euro clearing in London”. Until then, the exception that allows EU companies to do business in London will still apply.
More: Commission wants to force companies to clear in the EU