Wednesday, February 1

EU ramps up moves to limit financial link with post-Brexit London


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LONDON — The European Union published three draft laws on Wednesday to lift economic growth by deepening its capital market through less reliance on post-Brexit London, cutting red tape on company listings and streamlining insolvency rules.

Britain’s departure from the EU has forced the bloc to review its reliance on London for clearing trillions of euros in derivatives, EU financial services commissioner Mairead McGuinness said.

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The draft laws form the latest package in the bloc’s efforts to build a capital markets union.

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The first draft law seeks to build the bloc’s own capacity to clear derivatives, partly by mandating banks to clear more of their transactions via “active accounts” with a clearer inside the EU, rather than in London, or face capital charges.

The portion that must shift would be decided by EU regulators, but the relocation would be “gradual” and “with the grain” of the market to cut excessive rather than all reliance on London, an EU official said.

“We are not going to disrupt markets here,” the official said.

All EU access for UK clearers is due to end in June 2025 but the draft law now casts doubt on this, industry officials say.

Britain is also reforming its own financial rules, with more changes due to be announced on Friday.

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“We fully respect the right and capacity of the United Kingdom to do what it wants to do around its financial industry, in its interests, so I think there is a healthy respect and understanding of why we are doing it,” McGuinness said.

Banks pushed back against voluntary attempts to relocate euro clearing from London to Frankfurt, leaving the EU with little choice but to mandate the shift.

“It was never going to happen overnight… I think there is less resistance that there was in the early stages. There is an understanding that this is going to happen.”

“We don’t underestimate how big a change this,” she said.

The London Stock Exchange Group, whose LCH arm clears the bulk of euro interest rate swaps being targeted by the EU law, said it welcomed the acknowledgment of the importance of continued access for EU firms to UK clearing houses to hedge their risks in all currencies.

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The draft law also applies “lessons” from this year’s spike in energy prices after Russia invaded Ukraine, forcing governments to help energy companies meet rocketing margin calls on their gas derivatives.

Banks will have to inform energy clients regarding what sort of margin calls they can expect when markets change. There will also be tougher conditions on energy companies that want to be members of a clearing house.

The second draft law on insolvency aims to increase clarity and predictability for investors in one EU state who want to invest in a company in another member country on how would they get money back if the firm went bust.

The third draft law seeks to simplify how companies list to save about 100 million euros annually in compliance fees.

Brussels is proposing share structures which allow founders of a company to maintain control of a firm after listing, replicating a rule popular with tech firms in the United States and which Britain has copied. Prospectuses would also be streamlined to save 67 million euros annual.

The European Parliament and EU states have the final say on the rules with changes likely. (Reporting by Huw Jones; editing by Jason Neely, Kirsten Donovan)

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financialpost.com