Banks urged to shift clearing out of London in leaked Brussels document

Lucy BurtonTue, 23 February 2021, 6:37 pm

City
City

Brussels has ordered major banks to explain why they are not shifting lucrative euro derivative trading activity out of London as fresh battle lines are drawn between Britain and the European Union on financial services.

Banks have been asked to explain their views on shifting euro derivatives to the Continent so the European Commission “is aware of all possible impediments, obstacles and opportunities,” according to a questionnaire sent lenders.

Firms must also reveal which types of derivatives would be easiest to clear in the EU instead of Britain, the document seen by Reuters says.

The questionnaire is part of a bid by the EU to seize control of the so-called clearing market, which handles trading of complex financial instruments that underpin products such as fixed-rate mortgages. The City is the undisputed European leader in clearing, with the London Stock Exchange’s LCH arm dominating the continent’s €735 trillion (£658 trillion) annual market.

There were fears EU banks would lose access to the Britain’s clearing houses after Brexit, threatening London’s position, but the EU extended access until mid-2022 after warnings of serious disruption if services were cut off.

Clearing houses process financial products worth hundreds of billions of pounds every day, acting as middlemen between buyers and sellers for financial assets. The market has been a key area of debate since the EU referendum, with politicians on the Continent desperate for EU derivatives to be cleared in the bloc rather than London.

The questionnaire was sent out before a meeting on Friday, the first of a new European Commission working group on moving euro clearing.

It asked: “Several third-party service providers offer switching services, why aren’t they more used?”

The UK only emerged from a four-year legal battle with the European Central Bank over clearing trades in the eurozone in 2015, but Brexit gave politicians including former French president Francois Hollande reasons to restart the debate.

The European Commission has been approached for comment.