A new EU law agreed early this morning compels banks to use domestic financial infrastructure – but not everyone’s happy.
The EU has agreed a new post-Brexit law forcing its banks to partly onshore their clearing activity – and not everyone is happy.
The law, agreed early this morning (7 February), comes after the European Central Bank warned that continuing to rely on clearinghouses based in London could jeopardise financial stability.
The new law, which requires banks to hold an active account at a domestic clearinghouse, was welcomed in a statement by lead MEP Danuta Hübner (Poland/European People’s Party), who said it would improve the bloc’s competitiveness.
But Dorien Rookmaker (Netherlands/European Conservatives and Reformists), who led talks for her political group, was fulminating before the ink was even dry.
“Instead of companies themselves deciding where to do business, it’s politics that determines it,” she said in a post on social media network X.
It’s “as if the EU obliges you to do your shopping at Aldi 180 times while you normally do your shopping at the market,” she added, in the post sent hours after a deal had been announced. “Tonight, I walked into the cockpit of the plane up in the sky, and found no one there with a pilot’s license,” she added.
The new rules will strengthen the role of the European Securities and Markets Authority (ESMA), Hübner said, but appears to stop short of letting the EU agency directly supervise domestic clearinghouses.
That was another key ask from the ECB, which has argued the bloc needs to control financial-market activities that are critical to monetary policy.
Clearinghouses are vital parts of financial infrastructure offering a central counterparty where trades agreed on securities exchanges can be finalised, with European activity led by the London Stock Exchange Group’s LCH.
The EU has got tougher on limiting access to foreign clearinghouses in the wake of the UK’s departure. Yesterday ESMA withdrew privileges for a Dubai clearinghouse on money-laundering grounds.
The new law, known as the European Market Infrastructure Regulation, says banks must clear at least five trades in the most relevant classes of derivative using EU infrastructure, which in practice is likely to be Frankfurt’s Eurex.
While that’s not huge in the context of vast volumes of trades within the financial markets, it’s also “just the start”, the European Commission’s Mairead McGuinness said in a post on X – hinting at a future strengthening of onshoring rules that’s likely to meet a frosty reception from the industry.
Lobby groups such as the International Swaps and Derivatives Association (ISDA) have previously warned the EU would be unique in having a location requirement for clearing, ultimately harming pension funds and savers.
In a statement sent to Euronews, the head of ISDA’s Brussels office, Perrine Herrenschmidt, warned that the requirement to clear five trades could fragment markets and heighten risks.
“As regulators now begin to focus on technical details, we urge them to ensure this detail does not increase costs or negatively impact EU savers and investors,” Herrenschmidt said.
7 February 2024, 13:20: story updated to add quotation from Herrenschmidt.