London's euro-clearing business represents a threat to eurozone sovereignty, a senior French market regulator said at a conference, taking a strident stance in Europe's push to recapture trading in the single currency after Brexit, writes John Rega.
"Sovereignty, risk, competition and regulation" are concerns in the oversight of derivatives clearing, Philippe Guillot, executive director of markets policy at Autorité Des Marchés Financiers, told an industry conference* in Frankfurt.
"Location of clearinghouses is one of the issues," Guillot said. Providers deemed "critical" to the euro area should be forbidden to carry out their work elsewhere, he said.
Officials from the 19 euro countries are seeking to wrest euro-denominated trading away from the UK, where London Stock Exchange Group's SwapClear — the region's biggest derivatives clearinghouse — manages contracts with face values of more than 85 trillion euros ($91 trillion).
Britain's planned departure from the EU threatens to end a cooperation agreement between the Bank of England and the European Central Bank, which allowed the business to continue in London after an EU court fight.
In that case, European judges ruled that the ECB had no legal mandate over clearing, but left open the prospect that EU legislators could choose to impose the "location policy."
Sovereignty is at issue in clearing arrangements, Guillot argued, because government bonds are the chief form of collateral used in the market. The failure of a clearinghouse could pose a risk to those securities, he said.
"You do not want, as a sovereign country or as a sovereign union, to be dependent on the decisions of somebody who is not located in your zone," he said. "This is one of the key issues."
For clearing "critical" volumes, Guillot said the EU shouldn't recognize foreign clearinghouses. Under EU rules, the European Commission has recognized the "equivalence" of clearing rules in several jurisdictions — including the part of the US market regulated by the Commodity Futures Trading Commission.
Subcritical but "significant" clearinghouses could be recognized, but under a stricter test than now applied, Guillot added. He suggested that Europe demand a line-by-line match, rather than the current test, known as "outcome-based" equivalence.
Only smaller clearing providers could be granted that designation under prevailing conditions, Guillot said.
Europe shouldn't rely on the "equivalence" of rules abroad because authorities could slacken in oversight after winning recognition, he added.
Equivalence won't work for the UK financial industry, either, said David Wright, a Briton and past European Commission official who headed the International Organization of Securities Commissions until last year.
Participating in a panel discussion with Guillot, Wright said that equivalence decisions are difficult to obtain and the timing is too unpredictable for businesses to count on.
Wright called for the UK and EU to pursue a trade agreement in finance, entailing close cooperation in overseeing the industry, plus an enforcement mechanism.
"If London wants to maintain the current situation, it is going to have to work extremely hard and convincingly on the supervisory aspects," Wright said.
He said that this work should include standards for just-in-case recovery and resolution planning at clearinghouses — now the subject of a bill before EU legislators.
"I think that's possible, with good will," Wright said.* "IOMA: WFE's Clearing and Derivatives Conference," hosted by the World Federation of Exchanges in Frankfurt, 20 & 21 April 2017.