The EU’s head of financial services has vowed to avoid market instability or a « cliff edge » over a decision on European banks’ access to UK clearing houses, comments that will raise investor expectations that Brussels is preparing to extend its temporary permit.
Mered McGuinness said the European Commission will not engage in « any sudden swings » over the licensing decision that allows European banks to do billions of dollars in deals in London until the middle of next year. She said that a decision in this regard may come within weeks.
However, Ireland’s financial services commissioner urged market participants to take seriously the commission’s request for more euro-denominated derivatives business to move into the EU over the long-term, following the UK’s decision to exit the single market.
« We have to make sure that there is no short-term instability, but we also have to look at our long-term interests, » McGuinness said in an interview. “They should read my lips and hear what I have to say. We are looking at this as a strategic issue for us in the medium and long term.”
European and US banks and asset managers have been urging the committee to extend its « parity » decision again to access UK clearinghouses beyond next June given the massive amount of liquidity in the City of London market. Last month, they called on the European Union to take a « long-term approach » to the issue, to give the market more time to prepare.
However, the Commission wants to see business shift back to the EU because it is unhappy with the financial stability risks of handling up to €80 trillion of open contracts in a market that is no longer under its direct supervision. Clearinghouses sit between trades and prevent defaults from bouncing back in the rest of the market.
The committee’s problem is that there have been little signs of a shift in business towards the EU’s financial capitals since the UK left the single market at the beginning of the year. London-based LCH still handles about 90 per cent of all euro-denominated derivatives, according to data provider Ostra.
Users can net their positions by focusing them in one place, saving millions of dollars per day on the insurance needed to back their trades.
McGuinness acknowledged the lack of movement, saying it was no surprise because « there’s no incentive, there’s no reward for them to do anything. They probably only look at the cost. »
However, she insisted, « Everything that happens around the movement, which is still a point of discussion with us, will not happen overnight, but we believe it can happen over time. »
She said that while the EU had appreciated London’s clearing power when the UK was part of the single market, the situation is now different. « We need to keep that in mind, with no sharp or reckless decisions being taken – so there is no brinkmanship, » she said, adding that the commission was « close to some public announcements, but we’re not there yet. »
Tensions once again escalated between the European Union and the United Kingdom due to a dispute over trade between Great Britain and Northern Ireland. McGuinness insisted that the EU was not seeking to involve financial services in decision-making in the dispute over the UK’s Withdrawal Agreement.
« At the moment, we do not or will use financial services as a response, if you wish, » she said. « But then we don’t know exactly what the UK will do next. »
However, she emphasized that the planned Memorandum of Understanding on Regulatory Cooperation, which was finalized earlier this year by the two sides but was never signed, had been delayed due to broader tensions with the UK.
« Technically there, the memo, » she said. « I think it’s fair to say that if everything was going smoothly and the day-to-day shock of Brexit was not in the headlines, this memo would be put into action and we would have a dialogue. »
Among other things looming in the McGuinness portfolio is the launch of new rules for banking capital to implement the global Basel III agreement.
France has been leading a campaign to ease the implementation of Basel III via the so-called parallel stack approach, which would help prevent a significant increase in capital requirements by subjecting two versions of the bank’s balance sheet to different rules.
But Ms McGuinness said the Commission would reject this approach in favor of a tighter « one-group » system.
« We’re in a place now where there’s an understanding that a parallel stack – and we’ve talked about it – is not appropriate, » she said. She added that the committee would ensure there was no « significant increase in capital requirements » for banks as a result of the new rules. Copyright The Financial Times Limited 2021
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