HomeLatest newsThe EU backs off a bit on its crusade on derivatives clearing

The EU backs off a bit on its crusade on derivatives clearing

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It will not put an end to the equivalence with the United Kingdom, but it will require the ‘traders’ presence in chambers of the continent

Brussels threatened in February to block European banks from using UK-based clearing houses from 2025. It may now take a softer approach in its bid to capture the market.

Concerns have centered on the clearing of euro interest rate swaps, the bulk of transactions cleared by London-based LCH.Clearnet, a central counterparty (CPC) among traders that replaces them if one fails. LCH managed more than 96% of the 34 billion of these swap in the third trimester. The EU is concerned that it cannot prevent a catastrophic loss at the London vault used by European banks, putting taxpayers’ money at risk. Its banks continued to use LCH after Brexit, thanks to an equivalence framework that allows regulators to validate each other’s schemes, but which in this case expires in 2025. That seems like an exaggerated fear. Close cooperation between regulators could address most risks. ESMA said in July that its stress tests had shown a “general resilience” of Europe’s 15 largest CPCs, including LCH.

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In addition, BNP or Deutsche Bank have little interest in moving their operations to the mainland, where the only major player, Deutsche Boerse’s Eurex, accounts for less than 4% of the volume of these swaps. They would have to post more collateral as they would have less margin to offset similar exposures.

It seems that the EU proposal, which will be detailed next week, will not put an end to equivalence. will only require traders who maintain “active accounts” with “a minimum level of activity” at a CPC based in Europe. More than 60% of the investors of these swaps already do it.

Still, it could split the market and drive up costs. And ESMA could have a lot of discretion when setting the minimum. But the body has been flexible in extending the equivalence until 2025. And taking the issue away from politicians should raise the chances of closer cooperation and limit the risk of expensive measures.

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