The EU will demand that derivatives traders use accounts at clearing houses in the bloc for some of their transactions, as part of plans to take a share of the €115tn market processed through the City of London.
Banks dealing with large quantities of contracts that are deemed “systemic” by regulators would have to clear a minimum amount of business via active accounts in EU-based clearing houses, officials briefed on the proposals said.
The plans are part of a package intended to boost Europe’s capital markets and reduce the EU’s reliance on the UK’s financial services sector after Brexit. The European Commission is planning to outline the measures next month when it publishes proposals.
“It’s a very active policy in the EU to repatriate business back to the eurozone. They want to have control over where it is happening,” said Karel Lannoo, chief executive of European think-tank CEPS. “It’s a very serious issue for London.”
Most of the world’s interest rate swaps are processed in London, at clearing houses that have not moved since Brexit. Politicians in the EU are unhappy that euro-denominated derivatives are handled in a market outside their regulators’ direct oversight.
The draft rules aim to address what the EU sees as a “strategic vulnerability”, a senior commission official said. “It’s not about shifting all your business from London to the EU and never doing business with the City of London again. It’s about diversifying.”
The requirements under consideration would apply to derivatives, and could include credit swaps and futures.
The detailed thresholds under the new clearing regime would be set at a later stage, but one option is for the EU to demand progressive increases in the volumes required to go through EU-based clearing houses, the officials said.
To make it more attractive for investors to use EU clearing houses, the commission will also accelerate plans for authorising new derivatives products, responding to industry complaints that EU regulatory approvals are too slow compared with the UK. It will also step up dialogue between national clearing house supervisors, while enhancing the central role of the Paris-based European Securities and Markets Authority.
Britain’s control of the market has assumed a fresh urgency because from next summer EU pension funds, which hold investments for thousands of EU citizens, will also be required to clear their derivatives trades.
The commission this year agreed to extend its temporary permit allowing European banks and fund managers to use UK clearing houses until June 2025, warding off a threat to financial market stability when the arrangement was set to lapse at the end of June.
Mairead McGuinness, European commissioner for financial services, said the move would avoid any “short-term cliff-edge effects”.
But the commission has also vowed to stop issuing temporary extensions to its “equivalence” arrangement with the UK. Pushing more derivatives into clearing in Europe would potentially benefit Germany’s Deutsche Börse and Euronext, the Amsterdam-listed group that owns many of the eurozone’s stock exchanges.
“We would like to send a very strong signal to the markets that we are serious — and we will,” said the senior commission official, while adding that the rules would be carefully calibrated to ensure markets are not destabilised.
The commission is now working on draft amendments to the EU’s European Market Infrastructure Regulation, which will be tabled in early December, with a view to bolstering the EU’s market share of derivatives clearing.
The proposals come alongside two further sets of initiatives that the commission hopes will also boost its flagging Capital Markets Union project. These are reforms firstly to make it easier for small and medium-sized companies to tap public markets, including by permitting simplified prospectuses.
Secondly, the proposals would aim to better harmonise national insolvency rules. Among the ideas are simplified procedures for very small companies and a requirement that member states introduce so-called prepack regimes permitting the sale of some or all of a business before it enters insolvency.