By Huw Jones
LONDON (Reuters) – The European Union will have a “Plan B” that relocates clearing of euro-denominated derivatives from London to the bloc if it decides against long-term access for Britain, a top EU regulator said on Wednesday.
The London Stock Exchange’s LSE.L LCH unit has been given EU permission, known as equivalence, to continue clearing derivatives for customers in the bloc for 18 months after Dec. 31, when Britain’s Brexit transition arrangements expire. ICE ICE.N and the London Metal Exchange has similar permission.
LCH clears the vast majority of euro-denominated swaps, an activity core to London’s role as a global financial centre and which EU has long wanted to be in the bloc.
Long-term EU access for UK clearers would partly hinge on good relations between its regulator, the European Securites and Markets Authority (ESMA), and the Bank of England, the home regulator for LCH.
“Equivalence assumes good cooperation and we work very well with the Bank of England, but as a fallback plan it’s important to assess if there could be an argument to relocate those activities to the EU,” ESMA chair Steven Maijoor told Reuters.
The regulator will assess how a “credible plan” for relocating euro clearing would look and work, he said.
“Plan A is to support global capital markets and have equivalence, but you need to have a Plan B and need to invoke the Plan B if a clearing house is so systemically relevant… or if cooperation is not working as expected,” he said.
Banks have been reluctant to shift positions from London because of costs and complexity, but a detailed relocation blueprint would make it harder for them to drag their feet.
Maijoor said ESMA will make a policy statement soon on where EU investors are “obliged” to trade EU listed shares, the clearest sign so far of how cross-border trading in the City of London might be curtailed.
“What I expect that we come up with is very much in line with previous publications on this matter,” Maijoor said.
ESMA has said that in general shares of EU listed companies should be traded inside the bloc.
A similar statement on swaps trading will come before year end.
Markets are braced for potential volatility when full Brexit takes place on Dec. 31 and Europe’s biggest financial centre decouples from the bloc.
But Majoor said a survey by ESMA of national regulators showed overall satisfaction with preparedness of market participants.
“There are no special additional actions from us but we will closely monitor markets,” he said.
Regulators were more concerned that current market valuations are back up to pre-COVID levels despite a “grim” economic outlook, Maijoor said.
Markets suffered bouts of extreme volatility when economies entered lockdown in March to fight the pandemic.
“We are concerned about possible other rounds of volatility related to COVID and how the development of the second wave of infections will develop,” he said.
Reporting by Huw Jones; Editing by Tomasz Janowski
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