The EU is planning extortion tactics to force financial institutions to stop clearing derivatives in the City of London, the Governor of the Bank of England has warned, describing Brussels’ planned move as of “dubious legality” that Britain should “resist very firmly”.
Even though Britain has left the EU, the City with its massive scale and infrastructure continues to utterly dominate derivatives clearing in euros.
Clearing houses perform the vital function of ensuring trillions of pounds’ worth of transactions are made safely. London’s clearing market is worth £658 trillion.
The bloc is not on a strong footing in trying to steal business it sees as its own. There are severe doubts the EU has the capacity to take it on thanks to its scattered network of smaller financial centres such as Dublin, Paris and Frankfurt, none of which come anywhere close to matching London’s Square Mile. Nevertheless, in typical fashion, Eurocrats are hell-bent on dragging euro-denominated clearing over to the EU.
Currently in place is an 18-month deal that recognises Britain’s clearing standards are “equivalent” to the EU’s. After the deal expires, Brussels can remove equivalence and bring over the business. Such a move would take 25% of trade off of London’s hands, but the EU is determined to get the remaining 75%.
Speaking to the Commons Treasury Select Committee, BoE boss Andrew Bailey explained why the EU is after the whole pie, the quarter it can easily snatch isn’t good enough.
“The efficiency really comes from having a very big pool of derivatives that can be netted and cleared down,” said Bailey.
“By splitting that pool up, the whole process becomes less efficient, and having the smaller part of the pool is even less efficient.”
Brussels’ aggressive new rules, which Bailey described as “very controversial”, are aimed at bagging the whole market in order to make it “viable”. The rules would see financial institutions operating in Britain faced with extraterritorial legislation and penalties obliging them to move across the Channel.
“To get that by fiat would require something very controversial such as an attempt at extraterritorial legislation, or an attempt to force or cajole banks and dealers to say there will be some other penalty for you unless you move this clearing activity into the eurozone,” said Bailey.
“Quite bluntly, that would be highly controversial and it would be something we would have to and want to resist very firmly.”