Brussels bureaucrats risk severely damaging the financial system if they press ahead with a raid on London’s currency clearing operations, the Governor of the Bank of England has warned.
Andrew Bailey said that the European Union would undermine efforts to shore up stability in the wake of the financial crisis if it succeeded in prizing part of the £80 trillion clearing market away from the Square Mile.
He also insisted that the UK must be free to introduce its own regulations rather than blindly following those set by the bloc, and suggested that politicians on the Continent are threatening to unfairly impose more restrictions on London than other major financial centres.
Mr Bailey said: “If they want to take a decision to break the [clearing] system up, it is important to consider the risks to financial stability that come with fragmentation.
“This is not an idle, ‘you would say that, wouldn’t you’ from the UK’s central bank: that is a real threat.”
Clearing houses sit in the middle of trades between banks and ensure that the seller of derivatives gets paid even if the buyer goes bust. The market in Europe is dominated by the London Stock Exchange, but since the Brexit vote politicians on the Continent have repeatedly threatened to forcibly move it abroad.
The EU only deemed the UK’s regulatory regime for euro-denominated clearing to be equivalent to its own for a temporary period after Brexit.
That period is due to expire next June – raising the risk that financial institutions based in the bloc would be forced to find a clearing house in the EU after that date. About a quarter of the business carried out in the UK is denominated in euros.
By contrast the EU has deemed the US regulatory regime to be equivalent on a more permanent basis, despite the UK having identical rules to Brussels.
Mr Bailey said that clearing houses have served the market well and kept down customers’ costs.
He said: “We put clearing houses internationally so much at the centre of the ecosystem, deliberately so post-financial crisis, we have built up their resilience, we have just had a demonstration of that with the Covid crisis – they have come through well, they have done what we wanted them to.
“We have got the architecture and framework of international standards, let’s put it to work.”
Based on international precedents, Mr Bailey said, the EU should be happy with the UK’s set-up.
He said: “I have to say to the EU: we make it work with the US, you make it work with the US, the same principle and practice applies. I do not understand the argument that the UK-EU relationship should be different.”
Mr Bailey said that the UK aims to stick within global financial agreements on regulation, but that some rules may end up differing from those in the EU because both sides need to evolve as time goes by. He criticised suggestions that only the UK was planning to alter its rules, as the EU’s are likely to change too.
The Governor said: “Neither of us has got any interest … in diverging from international standards. What we do have is different markets.
“There are two moving parts. Sometimes it gets presented as if there is one stationary part and one moving part. It isn’t – there are two. That is perfectly sensible – we are both looking at the experience of Covid and asking how that impacts our rule books, how should we change?
“It is not a matter of us saying, ‘is the UK going to diverge from the EU?’ The EU is going to move as well.”
