Huw Jones

LONDON, (Reuters) – The European Union will not suddenly remove the “drawbridge”, on Britain’s financial sector. Reducing reliance on London to clear euro could take many years, a senior European Commission official stated on Tuesday.

According to the EU executive, clearing of euro denominated derivatives by EU market participants in London could be continued beyond June 2022. Permission was scheduled for expiration.

An additional period of time could be used to allow the bloc to grow its clearing capabilities, an essential part of the financial sector’s plumbing that has been politicised by Brexit. The London Stock Exchange cleared about 90% of all euro-denominated Swaps.

The City of London will be a financial hub that we want to continue using because it is close by and convenient. John Berrigan (head of the financial services section of the Commission) spoke at an event hosted by CEPS in Brussels.

Berrigan explained that “that balance, will we have to continue working on over the next few decades.”

According to banks, forcing euro derivatives clearance from London Stock Exchange (LSE) to Deutsche Boerse in Frankfurt is costly and would fragment the markets.

The EU will wait for a report by ESMA (the bloc’s markets watchdog), before deciding the length of Britain’s extension to market access. This is due within the next few weeks. The ESMA will report by year’s end to determine whether UK clearers pose a systemic threat to EU business.

Berrigan explained that after examining the options for clearing, Berrigan would recommend what timeframes and costs might be necessary.

Berrigan explained that “if you keep it open-ended the risk is that you will never complete it.” It’s not about drawing on protectionionism or drawbridges. It’s about finding the balance between our relationships and our alliances.

Froukelien Weindt, a member ESMA’s clearing oversight committee, stated that the report examined the impact of removing EU participants from London-based clearers.

Wendt explained that “there are also benefits” and those relate to EU supervisors and EU authorities in crisis situations, the ability to access information and being able, when necessary, to intervene efficiently.

Berrigan explained that the EU would need to create a clearing facility of “best in class”, which will be attractive and highly competitive.