UK Urged to Split Euro Clearing Business with European Central Bank

Shared responsibility of the market has been proposed as a way to prevent any damaging splits moving forward.

The European Central Bank and the UK should share regulation of the euro clearing market. So says one of its main lobbying groups, according to a report today in the Financial Times.

Such a move would mean the UK giving more powers to the ECB to oversee London’s euro clearing business and would help prevent any damaging splits in the global derivatives market.

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The Financial Service Negotiation Forum (FSN Forum), which was formed from supporters on both sides of the referendum campaign to produce evidence-based research on Brexit-related markets issues, said that in return the ECB should share supervision of clearing houses with the UK in order to address systemic risk concerns.

The idea behind the proposed joint supervision is to “avoid further accusations of ‘fortress Europe’” and could ease the tensions between London and the EU that followed in the aftermath of the Brexit vote. As the European hub for swaps trading, London trades a notional $930 billion a day in euro-denominated deals, something which has now become a subject of contention in Europe.

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Since the UK voted to leave the union, politicians including France’s François Hollande have demanded that the clearing of euro deals take place in the EU so that the business can be overseen by the ECB.

However, the FSN Forum stressed that the EU should not rush into making a decision on this topic as a political backlash to Brexit.

“It will be important to find solutions that at least preserve, or ideally enhance, the current level of supervision and oversight,” said Mario Draghi, Head of the European Central Bank.

EU rules presently give the ECB joint oversight of London-based clearing houses but do not allow for supervision of clearing houses outside the EU. Future arrangements will have to be negotiated as part of the UK’s exit. Forcing euro clearing into the EU could, however, carry potential risks for market economics and the international standing of the euro.

The proposal has also alarmed the derivatives market because banks would rather concentrate clearing in just a few locations. They argue it is a more efficient way to reduce the running costs of customers’ derivatives portfolios, while others have argued that the policy could cost thousands of jobs in the City.

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