The European Commission has recently issued a reprieve in its efforts to pull apart the business of UK clearing houses, saying it will continue to recognise the use by EU parties of UK clearing houses, temporarily, while it builds capacity to house the business within the EU.
But the Commission made clear its efforts will not abate. The EU is arguing that euro clearing is an essential part of its supply chain which it needs to control, and that this therefore needs to be onshored.
The EU rails at the fact that in 2011 and 2012 the London Clearing House – one of the three main UK clearing houses, increased “haircuts”, or discounts – applied to the value of southern eurozone member state bonds when received by the clearing house as collateral, to take account of the value those bonds had at the time.
However, the EU’s unique legal arrangements for the eurozone mean that the EU’s attempts to drag euro clearing to its shores are, indeed, reckless.
The EU’s wish to restrict the discounting of eurozone debt by clearing houses would present extreme risk when the markets take a different view of the value of that debt, for instance because they regard the fiscal arrangements within the issuing member state as having worsened.
What EU control would mean is that a clearing house would run an increased risk, at the behest of EU regulators, of its collateral being insufficient to cover losses; and because the clearing house sits in the middle, between buyers and sellers, this risk would effectively be mutualised among the world’s major financial institutions who provide their clients with clearing services.
The EU often likes to refer to the US as a comparator. But there is a profound difference. The US is a single country, with central organs which the federal sovereign stands behind. That is not true of the EU.
The EU is trying to run before it can walk. The world cannot stand by and allow it to do so, discarding the risks of its half-built currency system on to everyone else.
Barnabas Reynolds is a partner at Shearman & Sterling LLP