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Brussels has adopted “toothless” plans to force derivatives traders to funnel some of their deals away from the City of London after it agreed new rules designed to boost clearing in the bloc.
The revised rules, agreed early on Wednesday, will force EU-based banks and other financial institutions to open so-called active accounts at a clearing house in the bloc, which will handle categories of derivatives that the bloc’s regulators have deemed “systemic”.
The minimum threshold will be set at five trades for each relevant category, and also depend on the value of deals done, resulting in a maximum of 900 trades per year, according to EU officials.
The numbers that will be forced to go through EU clearing houses marks a significant climbdown from Brussels, which has made the issue of derivatives and clearing a symbolic issue post-Brexit.
European politicians have sought to reduce the bloc’s reliance on the UK financial services industry after Brexit and boost its own capital markets.
Clearing houses are central to staving off market instability, sitting between counterparties on deals and preventing defaults from cascading through the financial system.
More than 90 per cent of the world’s euro derivatives business is managed at LCH, but EU politicians had been unhappy that much of the activity sits outside the bloc’s direct oversight.
“The result is that the agreement is a missed opportunity. Unfortunately, the big winner of this agreement is the financial centre of London,” said Markus Ferber, a German MEP.
The move to shift clearing away from London had been resisted by banks, asset managers, pension funds and brokers across Europe, who argued that it would raise their costs.
The business has remained in London after Brexit because banks see the cost of breaking up and transferring parts of their derivatives positions as prohibitively expensive.
London Stock Exchange Group, which controls LCH, estimates that around 30 per cent of its euro derivatives business, which currently stands at €145tn, comes from the EU. In January, 917,642 trades were registered through LCH.
Ferber said the active accounts clause had been “watered down” during EU negotiations and it had become “a toothless tiger”.
It “could have been a sharp sword to attract clearing business to Europe. In the end, the obligation for the active account consists primarily of prerequisites, exceptions and review clauses,” he said.
The agreement will also give more powers to the European Securities and Markets Authority, the EU’s markets regulator, to co-ordinate activity and information sharing among EU clearing houses in an emergency.
“This will bring more clearing services to Europe and enhance our strategic autonomy,” said Vincent van Peteghem, minister of finance for Belgium, which currently holds the presidency of the Council of the European Union.
“It will also contribute to stabilising the market and make sure it functions efficiently, which is a prerequisite for a fully-fledged capital markets union,” he said.
Danuta Hübner, a member of the European parliament, said officials might “take further measures in two years’ time” following an assessment by Esma.
The EU also said that companies active on energy markets, which include producers and utilities, should be monitored for potential risks to financial stability. Some countries, such as Sweden, Finland and Germany, were forced to provide credit guarantees to local utilities in the summer of 2022 to help them through the impact of record energy prices.
The move comes before a temporary permit allowing European banks and fund managers to use UK clearing houses until June 2025 lapses.
This article has been corrected to make clear that European authorities agreed to new standards that could result in up to 900 more derivatives trades a year sent through European clearing houses, and not five as stated in an earlier version.
