The EU’s financial services chief has pledged to avoid market instability or a “cliff edge” over a decision on European banks’ ability to access UK clearing houses, comments that will raise investors’ expectations that Brussels is preparing an extension to its temporary permit.
Mairead McGuinness said the European Commission would not engage in “any sudden twists and turns” on a decision over the licence that allows European banks to clear deals worth billions in London until the middle of next year. A decision on the matter could come within weeks, she said.
However, the Irish financial services commissioner also urged market participants to take seriously the commission’s demand that more euro-denominated derivatives business move to the EU over the longer term, following the UK’s decision to quit the single market.
“We have to make sure that there is no instability in the short-term, but we also have to look at our long-term interests,” Ms McGuinness said in an interview. “They should read my lips and hear what I am saying. We do view this as a strategic issue for us in the medium, long term.”
European and US banks and asset managers have been urging the commission to again extend its “equivalence” decision for access to UK clearing houses beyond next June given the huge amount of liquidity in the City of London market. Last month they called on the EU for a “longer-term approach” to the issue, to give the market more time to prepare.
The commission, however, wants to see business shifted back to the EU because it is unhappy about the financial stability risks of seeing up to €80 trillion of open contracts being handled in a market that is no longer subject to its direct oversight. Clearing houses sit between deals and prevent defaults from ricocheting through the rest of the market.
The problem for the commission is that there has been little sign of any shift in business towards EU financial capitals since the UK’s exit from the single market at the start of the year. London’s LCH still handles about 90 per cent of all euro-denominated derivatives, according to data provider Osttra.
Users can net their positions by concentrating them in one place, saving them millions of dollars a day on the insurance required to back their deals.
Ms McGuinness acknowledged the lack of movement, saying it was not a surprise because “there is no incentive, there is no bonus for them to do anything. They may only be looking at the cost.”
However, she insisted: “Whatever happens around movement, which is still a point of discussion with us, will not happen overnight, but we believe can happen over time.”
While the EU valued London’s strength in clearing when the UK was part of the single market, the situation was now different, she said. “We need to take account of that, while not making any sharp or rash decisions - so no cliff edge,” she said, adding that the commission was “getting close to some public announcements, but we are not there just yet”.
Tensions have been rising again between the EU and UK because of the wrangling over trade between Great Britain and Northern Ireland. McGuinness insisted the EU was not seeking to embroil financial services decision-making in the dispute over the UK withdrawal agreement.
“At the moment we are not, if you like, using or will use financial services as a reaction,” she said. “But then we don’t exactly know what the UK are going to do next”.
Nevertheless, she confirmed that a planned memorandum of understanding over regulatory co-operation, which was finalised earlier this year by the two sides but never signed, was being delayed by broader tensions with the UK.
"It is technically there, the memorandum," she said. "I think it is fair to say that had everything run smoothly and the day-to-day trauma of Brexit was not in the headlines, this memorandum would be put into practice and we would have dialogue."
Among the other matters looming inMs McGuinness’s portfolio is the launch of new bank capital rules implementing the global Basel III accord.
France has been leading a push to soften the implementation of Basel III via a so-called parallel stack approach, which would help prevent a big uplift in capital requirements by subjecting two versions of a bank’s balance sheet to different rules.
But Ms McGuinness said the commission would spurn that approach, in favour of a tighter “single stack” regime.
“We are at a place now where there is an understanding that the parallel stack – we have talked it through – isn’t appropriate,” she said. She added that the commission would ensure there would not be a “significant increase in capital requirements” for banks as a result of the new rules. – Copyright The Financial Times Limited 2021