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‘End of the road’ for London euro clearing after June 2025, says EU official

The European Union agreed on Tuesday to extend until June 30, 2025 the permission for UK clearing houses to continue serving clients in the bloc, with officials saying it would be the last extension.


Clearing has become a Brexit battleground between Britain and the EU as the bloc seeks to control euro-denominated transactions to build “strategic autonomy” in capital markets.


The London Stock Exchange’s LCH unit in London clears around 90% of euro interest rate derivatives, a contract widely used by EU companies to insure against unexpected movements in borrowing costs.


Mairead McGuinness, head of financial services at the European Commission’s executive, said she would also propose measures to reduce “our overreliance” on major clearers based outside the bloc and to improve the attractiveness of clearers based in the EU while increasing their monitoring as volumes increase.


The EU has been forced to extend clearing permission for LCH and two other clearers in London, ICE and LME Clear, after failing to persuade banks and their customers to move business from London to Eurex quickly enough of Deutsche Boerse in Frankfurt.


An abrupt end to cross-border clearing would have disrupted markets, but EU officials believe three years will be long enough to shift enough activity without needing a further extension.


“It’s clearly the end of the road, there will be no extension after these three years,” an EU official said.


Eurex said on Tuesday that average daily volumes cleared in interest rate swaps reached a record 276 billion euros ($314.75 billion) in January, representing a market share of 22%.


“In the long term, the clearing of the euro must take place in Europe,” said Markus Ferber, a German member of the European Parliament, adding that London had benefited from EU inaction.

REDUCTION TARGETS


The 46-page EU consultation document asks for views on possible ‘negative and positive’ incentives, such as forcing EU market participants to open and use a clearing account with the bloc’s clearer , and impose targets on clients to reduce their use of specific UK clearers.


Incentives could include increased capital charges on EU banks’ exposures to UK clearers to encourage a shift in clearing across the Channel, while forcing more private and public entities like credit managers assets and pension funds in the EU to clear their transactions, an EU official said.


The range of products that must be cleared could also be expanded.


EU customers make up a minority of the London Stock Exchange‘s euro clearing business, and the exchange said it was focused on keeping the markets functioning orderly. ICE had no immediate comment.


The four-week consultation period will be followed by a ‘communication’ setting out the way forward, with a legislative proposal in the third quarter.


Data would be collected from market participants to monitor the reduction in their exposure to UK clearers over time, but EU officials declined to say how much clearing would need to be moved to satisfy the bloc’s authorities.


Banks have warned they could move clearing from London to the United States, where clearinghouses already have long-term access to EU customers.


Eurex is focused on euro-denominated clearing, but banks say they want to stick with LCH in London because it offers clearing in multiple currencies to reduce the amount of capital and collateral needed.

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