European Strategies to Reduce Dependence on UK Financial Infrastructure

The recent approval of controversial measures by European Union governments aimed at reducing reliance on UK clearing houses following Brexit is a significant development. This decision reflects the EU’s concerns about the potential impact on bank stability due to continued dependence on London-based financial infrastructure.

The primary intention of the EU is to lessen its dependence on financial infrastructure that falls outside its regulatory jurisdiction, including institutions in the nearby financial hub of London. The focus is particularly on clearing houses, which play a crucial role in finalizing trades made on stock exchanges.

While this traditional arrangement is generally considered a safer option than bilateral settlements between banks, EU policymakers are apprehensive about the potential risks posed by the two UK-based clearing houses, specifically the London Stock Exchange Group’s LCH and ICE Clear Europe. As a result, European authorities are exploring ways to encourage EU banks to choose domestic providers.

A draft law agreed upon by the EU’s Council highlights the risk of “excessive exposures” to major clearing houses outside the bloc. It also proposes that banks maintain a separate account with an EU alternative to be used in the event of a crisis. This regulation, known as EMIR, will now undergo further deliberation with lawmakers from the European Parliament’s Economic and Monetary Affairs Committee.

The European Commission’s initiative to strengthen the bloc’s own clearing capacity has received support from the European Central Bank. In a statement, they expressed strong approval for measures aimed at “supporting a gradual creation of a resilient and liquid Union-based clearing market.” However, these plans have sparked controversy within the financial industry, with concerns raised about potential fragmentation of activity, increased costs, and excessive powers granted to EU securities markets watchdogs.

Opponents of the EU’s measures, including the International Swaps and Derivatives Association, have warned about the adverse impact of a location requirement for market participants. They argue that such a policy would place the EU at a competitive disadvantage, ultimately harming European pension savers and investors. Additionally, joint statements from EU banking and fund lobby groups have echoed these concerns, emphasizing the potential drawbacks of the proposed changes.

In conclusion, while the EU’s efforts to reduce reliance on UK financial infrastructure are driven by concerns over financial stability and regulatory control, they have also sparked debates within the industry. As these measures progress, it will be crucial for authorities to carefully consider the potential impact on market participants and the overall stability of the financial sector.