Brussels agrees new rules to shift derivatives clearing from London

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Brussels has agreed rules that will force derivatives traders to funnel part of their deals through accounts at clearing houses in the bloc, in a plan to wrestle a share of the vast market away from the City of London.

The revised rules, agreed early on Wednesday, will force EU-based banks trading quantities of contracts that are deemed “systemic” by regulators to send a minimum amount of business to an EU clearing house.

The controversial move, which has been resisted by banks, asset managers, pension funds and brokers across Europe, is part of Brussels’ efforts to reduce its reliance on the UK financial services market after Brexit and boost its own capital markets.

Clearing houses are central to staving off market instability, sitting between counterparties on deals and preventing defaults from cascading through the financial system.

More than 90 per cent of the world’s euro derivatives business is managed at London’s LCH, but EU politicians are unhappy that much of the activity is outside the bloc’s direct oversight.

“This will bring more clearing services to Europe and enhance our strategic autonomy,” said Vincent van Peteghem, minister of finance for Belgium, which currently holds the presidency of the Council of the European Union.

“It will also contribute to stabilising the market and make sure it functions efficiently, which is a prerequisite for a fully-fledged capital markets union,” he said.

The Council of the European Union said EU traders above a certain threshold would be required to put some derivatives through so-called active accounts at EU clearing houses.

The rules would also give more powers to the European Securities and Markets Authority, the EU’s markets regulator, to co-ordinate activity and information sharing among EU clearing houses in an emergency.

London Stock Exchange Group, which controls LCH, estimates that less than 10 per cent of its euro derivatives business, which currently stands at €143tn, comes from the EU.

While the move is likely to benefit EU-based clearing houses run by companies such as Deutsche Börse and Nasdaq, critics have warned that it is likely to significantly raise costs for EU banks and investors.

The business has remained in London after Brexit because banks see the cost of breaking up and transferring parts of their derivatives positions as prohibitively expensive.

“The EU forces banks to split accounts and they lose scale economies,” said Karel Lannoo, chief executive of Brussels-based think-tank CEPS.

“EU banks will have no choice, they will have to do part of their trade within the EU [clearing houses] but because of the fact that they’ll have to split their accounts between EU and UK [clearing houses] their costs will increase compared to their competitors who won’t do this,” he said.

The move comes before a temporary permit allowing European banks and fund managers to use UK clearing houses until June 2025 lapses.