A four-year battle in the European Court of Justice (ECJ) over the location of clearing services for euro-denominated securities may be revived again post-Brexit, according to senior EU figures.
A 2011 ECB policy requires clearing houses handling a significant amount of euro-denominated transactions to be in the eurozone, to allow closer oversight. In what seemed confirmation that the city could remain the financial capital of Europe without sharing the currency it was a victory for London, but now just over a year later, that win looks to be at risk again.
In its case to the European Court of Justice (ECJ), the UK had argued that a location policy would be discriminatory and challenging to its role within the single market. The agreement saw swap lines between the ECB and the Bank of England (BoE) enhanced to ensure liquidity support in times of crisis.
This agreement is not in any way linked to EU regulation and so in theory, there’s no reason why it would cease to be effective, explained think tank Open Europe co-founder Raoul Ruparel. “But politically, the ECB may want to make a play for it,” he added. “Clearing houses are really a wildcard at the moment.” The European clearing market is said to be worth between €600 billion and €1 trillion.
It’s also not a legal requirement that euros be cleared in the EU: unlike China’s yuan, for example, the euro is a free currency. CME Group recently announced the launch of EU wheat futures and options in Chicago, all denominated in euros and all physically deliverable in France.
- Post-Brexit comments by EU officials have indicated that London’s longstanding role in clearing euro-denominated securities may be under threat in future;
- The ECB has long claimed this should take place inside the eurozone, but Britain successfully appealed to the ECJ on discrimination grounds – a right it no longer has;
- There is no legal basis for the ECB’s clearing location argument as euro trades are cleared across the world, but the political landscape is shifting dramatically.
So if policymakers decided the UK could no longer settle euro-denominated payments on the grounds that it’s outside the EU, the global reverberations would be seismic. Accusations of protectionism probably wouldn’t be far behind, and it’s somewhat counterintuitive to a continent doing everything it can to promote economic growth, particularly in capital markets.
In what could be viewed as an indication of things to come, French President François Hollande said at a post-referendum Brussels summit that it would be unacceptable for such a crucial stage of derivatives and equities trading to take place in the UK, given the circumstances.
This was of course an over-simplified political statement more than anything else, and with considerable skin in the game – it’s no secret that Paris is vying for a piece of the London pie – it’s not so surprising.
“Clearing is only part of the story. A close relationship is needed between trading and clearing venues,” said a source at a European central bank. “And ultimately those trading venues are still in London. The landscape will obviously change if it’s going to be outside of the single market, but for now it’s still the financial centre of Europe.”
But the case may be intensified by the EU’s new commissioner for financial services, a post held by Brit Jonathan Hill pre-referendum, is Latvian Valdis Dombrovskis, vice president for the euro.
Stripping London of its clearing status would probably require a change to the statute book, explained Ruparel, which would then need the approval of a qualified, significant majority of eurozone members, which at this stage, looks less likely.
Meanwhile British commissioner Lord Hill’s post overseeing financial stability, financial services and the capital markets union (CMU) has now been filled by Latvian Valdis Dombrovskis – who is also vice president for the euro. So not only has Britain’s bargaining power already slipped, but a policy swing towards the eurozone, particularly when it comes to the CMU, is now more likely than ever.
And importantly, if the ECB does decide to play hardball with clearing at some point down the line, Britain no longer has the right to appeal to the ECJ as in the past, a privilege granted to member states only.
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