Financial industry urges EU to extend euro swaps clearing in London

LONDON: The European Union should allow clearing houses in Britain to continue serving customers in the bloc to avoid a significant risk of market disruption, nine financial industry bodies said on Thursday.

Britain fully left the EU last December and the London Stock Exchange, whose LCH SwapClear arm clears the bulk of swaps denominated in euros, has temporary permission to continue serving customers from the EU until June 30 next year.

Brussels is putting pressure on banks to shift activity worth trillions of euros to Deutsche Boerse's Eurex arm in Frankfurt where it could be directly supervised for any threats to financial stability.

In a letter on Thursday to EU financial services chief Mairead McGuinness, the industry associations call on her to provide certainty to the market by either extending the current temporary permission or granting open-ended permission to allow a "natural" shift in business from London to Frankfurt already underway, to continue.

If clearing permission is not extended from June 2022, the LSE would need to give EU customers three months' notice to shift euro clearing outside Britain.

"We would also request the Commission to inform EU market participants of its intention as soon as possible and before March 2022 to address the ongoing uncertainty confronting the Joint Associations' EU clearing members and their clients, which already negatively impacts their clearing business," the letter said.

Market bodies SIFMA and AFME, derivatives industry bodies ISDA and FIA, investment industry associations EFAMA, ICI and AIMA, and the European Banking Federation and EAPB banking bodies, said the location of clearing is driven by commercial factors.

"However, we would also note that based on publicly available data we are starting to see a natural, gradual shift of activity to EU CCPs (central counterparties)," the letter said.

"We would welcome an extension to the current time-limited equivalence decision to allow this natural, market-led shift to continue and also to allow EU CCPs to continue to develop their offering."

On Tuesday, Bank of England Governor Andrew Bailey urged banks to wait, rather than risk financial stability by fragmenting markets by shifting clearing to Frankfurt.