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Brussels to extend EU banks’ access to UK clearing houses past June 2022

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Brussels will extend its temporary permit allowing European banks to access UK clearing houses, heading off a potential threat to financial market stability when the arrangement lapses next summer.

Mairead McGuinness, European commissioner for financial services, said on Wednesday the decision would be formally announced early next year to help avoid “a cliff edge” for EU banks when the permit expires in June 2022.

The move is intended to give banks, other financial companies and asset managers more time to move more of their euro-denominated contracts out of the City and to the eurozone. Clearing houses are central to staving off market instability, sitting between parties on deals and preventing defaults from cascading through the financial system. London’s LCH still handles about 90 per cent of all euro-denominated derivatives, according to data provider Osttra.

Brussels signalled its intent to award the extension as relations between the UK and EU have frayed over the Northern Ireland protocol, with the UK government threatening to trigger an Article 16 clause in protest at the Brexit trade arrangements for the region.

EU diplomats said the move on clearing houses was made this week to avoid getting snarled up in broader tensions and possible retaliatory measures over the protocol.

The commission, however, wants to see derivatives clearing business shifted back to the EU because it is unhappy about the financial stability risks of seeing up to €80tn of open contracts being handled in a market that is no longer subject to its direct oversight.

McGuinness told the Financial Times last month she was determined to avoid any market instability over the clearing decision, which had raised investors’ expectations that Brussels was preparing an extension to its permit.

The market has been unwilling to move from London because users can concentrate their portfolios in one place, net their positions and save millions of dollars a day on the insurance required to back their deals.

But McGuiness admitted the June 2022 expiry date “was too short” to build up capacity over the medium term.

“This proposed way forward strikes a balance between safeguarding financial stability in the short term — which requires taking an equivalence decision to avoid a cliff edge for EU market participants — and safeguarding financial stability in the medium term, which requires us to reduce this risky over-reliance on a third country”, she said.

The extension will also give EU regulators time to assess the risks to the bloc from UK clearing houses such as LCH and ICE Clear Europe.

“The EU has at last accepted that it underestimated how vital UK-located clearing services were to the EU,” said Michael McKee, financial services regulatory partner at DLA Piper. “Longer term, however, the EU will want to develop its own clearing capacity.”

McGuinness said she would announce measures in the new year to incentivise clearing to go to the EU. The commission will also build up the bloc’s supervisory framework.

The Bank of England earlier this week unveiled its long-term plans to monitor overseas clearing houses that affect the UK’s financial stability. The BoE said its plans would be based on rules agreed when the UK was in the EU and also on the depth of relationship it enjoyed with another supervisor, said Christina Segal-Knowles, head of financial market infrastructure at the BoE.

“We’re trying to take an approach that is technocratic and risk-based . . . It’s very important for us at the BoE that these things are not politicised,” she said.

Additional reporting by Laura Noonan in London

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