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EU gives banks 18-months to cut "excessive" reliance on UK clearers

Huw Jones
·2-min read
FILE PHOTO: European Commission presents its Semester Package
FILE PHOTO: European Commission presents its Semester Package

By Huw Jones

LONDON (Reuters) - Banks and other financial market participants in the European Union will have until mid-2022 to cut their "excessive reliance" on derivatives clearing houses in Britain, the bloc's executive European Commission said on Monday.

Britain, which hosts Europe's biggest financial hub in London, left the EU in January and its unfettered access to the bloc ends in December.

EU financial services chief Valdis Dombrovskis said he has approved a proposal to allow clearing houses or central counterparties (CCPs) in Britain to continue serving EU customers for 18 months from January 2021.

"This time-limited decision has a very practical rationale, because it gives EU market participants the time they need to reduce their excessive exposures to UK-based CCPs, and EU CCPs the time to build up their clearing capability," Dombrovskis said in a statement.

Clearers stand between the two sides of a trade, ensuring its orderly completion even if one side goes bust.

LCH, a unit of the London Stock Exchange <LSE.L>, clears the bulk of euro-denominated interest rate swaps that are widely used by companies to hedge against adverse moves in borrowing costs. ICE Clear Europe <ICE.N> is also used by EU clients.

The Bank of England, which regulates LCH, said it welcomed the EU's decision, though a time-limited one, to avoid shifting contracts in a short period which would raise financial stability risks.

As of August 2020, there were 60 trillion pounds of derivative contracts between clearers in Britain and their EU members, with 43 trillion of this due to expire after December, the BoE said.

Brussels and the European Central Bank want euro clearing located in the bloc where it can be directly regulated, viewed in Britain as an attack on the City of London as a global financial centre.

"Accordingly, industry is strongly encouraged to work together in developing strategies that will reduce their reliance on UK CCPs that are systemically important for the union," the EU executive said.

Shifting existing swaps positions worth billions of euros from London would be a complex and costly undertaking for banks.

(Reporting by Huw Jones; Editing by Toby Chopra, Kirsten Donovan)