On Thursday, trade groups representing banks and investors launched a last ditch bid to stop the European Union from forcing euro derivatives clearing to move from London.
A joint letter from 11 industry bodies started with an unctuous tone of false humility that seemed to channel the Charles Dickens character Uriah Heep.
The trade groups said that they “support positive incentives to further enhance the attractiveness of EU clearing and EU capital markets”.
They then eased towards their main points – with the equivalent of a gentle cough.
Further efforts should focus on streamlining the supervisory framework for EU central counterparties for clearing and making local clearing for local customers more attractive.
Clearing reforms should support EU financial stability, facilitate choice and protect the competitiveness of EU market participants.
Finally, the letter came to the point. Globally agreed reforms of over-the-counter derivatives as they were implemented in the EU through its European Market Infrastructure Regulation (Emir) have made the markets safer.
“It is important to build on the progress made and not introduce policies that would disrupt and fragment the global clearing system,” the letter said.
Self harm
The trade groups then warmed to their theme, which is essentially that EU officials are so determined to force the lucrative business of euro derivatives clearing to move from London in the wake of Brexit that they are willing to harm their own banks and investors.
The letter said that the proposed active account requirement, which is designed to prompt use of EU-based clearers – mainly Eurex – would introduce fragmentation, reduce derivatives netting benefits and make the EU less resilient to market stresses.
The requirement would create a competitive disadvantage for EU firms compared with competitors who could transact on global markets without restrictions.
This is powerful stuff, certainly by the standards of financial market lobbying
The trade groups said the introduction of quantitative thresholds for the active account requirement would be “especially damaging and could lead to a large, volatile and unpredictable price difference between [central clearing counterparties], which would significantly increase the cost and risk of hedging for EU clients. Ultimately it would harm European pension savers and investors”.
The trade groups criticized the latest version of the relevant regulation – Emir 3.0 – for failing to address reform goals for clearing counterparties that were made in 2021 by the EU’s own supervisory body, Esma.
The letter then makes an astonishing accusation: that the EU’s clearing proposals outdo even the US in jealously guarding financial market territorial rights.
“A location requirement for market participants would make the EU one of the only advanced capital markets with such a policy,” the letter said. "By contrast, US clearing participants are significantly exposed to Tier 2 [clearers], since the majority of US-dollar-denominated interest rate swaps are cleared outside the US. The fact that US authorities have not sought to impose a location policy suggests that most jurisdictions believe central clearing markets are global by nature and financial stability risks are best managed through a solid shared oversight framework between supervisors."
Long arm
That is powerful stuff, certainly by the standards of financial market lobbying.
The commitment of the US to regulating virtually anything that involves a trade in US dollars is legendary. From enforcing sanctions to arresting suspects who drift anywhere near US jurisdiction, the long arm of the US law is rightly feared. The EU’s biggest bank, BNP Paribas, can testify to the cost of taking this too lightly, after paying almost $9 billion in 2014 for violating US sanctions.
The big banks and investors who pushed their trade groups to levy this accusation against the EU obviously feel that they are at serious risk of financial injury from the proposed clearing reforms.
Whether they waited too long to protest over changes that are already being considered by politicians remains to be seen.
