Huw Jones

LONDON, (Reuters) – On Tuesday, the European Union approved a prolongation of permission to Britain to clear its clearing houses until June 30, 2025. Officials stated that this would be the last extension.

Clearing has been a Brexit battlefield between Britain and EU, as the EU seeks to take control of euro-denominated transactions in order to establish “strategic independence” in capital market markets.

LCH, the London Stock Exchange unit clearing euro interest rate derivatives in London, cleared about 90%. This contract is widely used in Europe by businesses to protect themselves from unexpected changes in borrowing costs.

Mairead McGuinness is the chief financial officer at the European Commission.

LCH cleared permission was extended by the EU to ICE in London (NYSE:) as well as LME Clear after banks failed to persuade customers and banks to transfer activity to Deutsche Boerse (DE) in Frankfurt.

Officials from the EU believe that three years of cross-border clearing will suffice to move enough businesses without requiring a new extension.

A EU official declared that it was clear that the “end of the road” is reached.

Eurex reported Tuesday that the average daily clearing volume in interest rate swaps rose to 276 billion euro ($314.75 trillion) in January. This is a 22% market share.

Markus Ferber (a German Member of the European Parliament), said that euro clearing must take place in Europe in the long-term. He added that London had benefited from EU inaction.

REDUCTION TARGETS

The EU’s 46-page consultation paper https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/2022-central-clearing-review-consultation-document_en.pdf is asking for views on possible “negative and positive” incentives, such as forcing EU market participants to open and use a clearing account with the clearer in the bloc, and imposing targets on customers to cut their use of specific UK clearers.

One EU official suggested that incentives might include raising capital charges on EU banks’ exposures to UK Clearers, to incentivize a shift towards clearing across the Channel. This would also encourage more private and government entities, such as pension funds and asset managers, to clear their trades.

A wider range of products could be allowed to clear the border.

The London Stock Exchange’s euro clearing business is dominated by EU customers. However, the London Stock Exchange said that it is focused on maintaining orderly markets. ICE had no immediate comment.

After the four-week consultation, a communication will follow out. A legislative proposal is expected in the third quarter.

To monitor market participants’ exposure to UK clearers, data would be collected. EU officials however declined to give an estimate of how much clearing is required in order to satisfy their authorities.

Banks warned that they might shift clearing from London into the United States. Clearing houses in America already have long-term access EU customers and have been warning of this.

Eurex is focused on clearing in euro, but banks want LCH London as it allows clearing across multiple currencies. This will reduce the need for collateral and capital.

($1 = 0.8769 euros)