Huw Jones

LONDON, (Reuters) – London’s big derivatives clearinghouses should remain open to customers within the European Union until they have ‘incentives,’ such as capital fees.

EU policymakers wanted to move multi-trillion dollar clearing from London even before Brexit. This is so that it could be overseen by the European Central Bank and its other agencies, especially in times of market turmoil.

Despite Britain’s complete withdrawal from the EU a full year ago, the London Stock Exchange still clears around 90% of the euro interest rates swaps used on the continent by companies to hedge against adverse movements in borrowing costs.

The bloc tried to convince banks to move clearing to Frankfurt from London via Deutsche Boerse (DE) but to no avail.

European Securities and Markets Authority (ESMA), the EU’s European Securities and Markets Authority, published Friday its eagerly awaited report. It examined whether London’s euro clearing was important enough to be moved to the EU.

ESMA stated that it found euro and Polish zloty clearings at LSEG (NYSE: Clear) were “substantial” systemic and posed risk to EU financial stability. These risks may not be completely mitigated by current regulations.

ESMA stated, however that there are risks and costs to EU customers who use London-based clearers.

The London watchdog suggested “appropriate incentives for reducing EU exposures”, which were presented by the watchdog to the clearers.

They could also include the requirement for alternate clearing arrangements for clearing clients or members, as well as appropriate prudential requirements (capital charges) to effectively incentivise participants to lower their exposures.

Froukelien Youndt (member of ESMA’s clearing supervision committee) stated that if these incentives were brought forward, “we expect that liquidity will shift in a manner that makes the EU CLEARERS attractive, the price lower, and the product offering wider.”

ESMA also stated it would like to increase its cooperation with Bank of England so that it has more authority to act in London clearers in the event of failure.

Many parts of Britain are now disconnected from the EU. However, Brussels gave permission for banks within the bloc to continue clearing London contracts up until June 2022.

Mairead McGuinness, EU’s chief financial services officer, has stated that she would propose a temporary extension. She will use the ESMA Report to determine how long it should be and end London overreliance.