EU scales back ambitions for post-Brexit clearing land grab

EU plans to funnel derivatives trades through its own markets are unlikely to wrest a significant slice of the lucrative clearing business away from the City of London after a climbdown by the bloc’s lawmakers, according to analysts and people involved in the negotiations.

The business of validating financial transactions has become a political battleground since the UK’s 2016 vote to leave the EU, as the bloc seeks to chip away at London’s overwhelming dominance in euro-denominated derivatives clearing and bolster the resilience of its own financial markets.

But rules agreed last week, following years of wrangling, are widely seen as Brussels backing down from earlier ambitions for a more substantial land grab, after being undermined by Franco-German tensions and a backlash from the finance industry.

The deal “is relatively soft and is not going to lead to a significant shift in activity” out of London, said William Wright, founder of think-tank New Financial. In terms of addressing financial stability concerns, the EU “can just about claim that this achieves that”, he added.

Clearing houses are a low-profile but vital piece of financial market plumbing. By standing between a buyer and seller in a trade, they are designed to cut risk by stopping defaults cascading through the system.

London — Europe’s pre-eminent financial centre — has long dominated the business, with its large clearing house, London Stock Exchange Group’s LCH, able to enjoy economies of scale, which helps attract customers.

Even in euro-denominated derivatives, a market totalling €172tn last, year according to Clarus Financial Technology, LCH handles more than 90 per cent of trades. LCH estimates that about 30 per cent of its business in this market comes from the EU.

Under the new rules, EU-based banks and other financial institutions must open so-called active accounts at a clearing house in the bloc, which will handle categories of derivatives that regulators consider…