EU agrees post-Brexit clearing rules in bid to break London’s grip on market

The European Union has agreed on a provisional deal in an attempt to bring to an end London’s grip on clearing the euro derivatives market.

Clearing is a crucial part of financial plumbing that helps firms manage the risks that might arise if one counterparty defaults on a deal. The vast majority of euro-denominated deals take place in London, much to the EU’s frustration.

The agreement, announced today, establishes an “active account requirement” for firms, meaning banks must have an account with an EU-based clearing house to clear contracts.

Vincent Van Peteghem, finance minister for Belgium, said “this will bring more clearing services to Europe and enhance our strategic autonomy”.

“It will also contribute to stabilising the market and make sure it functions efficiently, which is a prerequisite for a fully-fledged capital markets union,” he continued.

Clearing has been one of the most prominent sources of tension between the UK and EU. Even after Brexit, around 94 per cent of Euro denominated swaps taking place at London Clearing House (LCH), according to figures from Clarus.

Under the rules announced today, traders above a certain threshold will have to funnel some derivatives through accounts at EU clearing houses.

A Joint Monitoring Mechanism will be created to keep track of this new requirement.

Critics of the EU’s plans have warned that it will raise costs for banks and asset managers, as they will have to establish multiple pools of liquidity.

The EU has granted equivalence status to London-based clearing houses until June 2025. Firms warn that if the EU does not extend its deadline, there could be a “cliff-edge”.