The European Central Bank’s has pushed to take charge of supervising the lucrative business line of clearing euro trades, days after Brussels called for powers to force parts of London’s clearing business to relocate to the EU after Brexit.
Benoît Cœuré, a member of the ECB’s executive board, backed the European Commission’s call for a new set of rules to govern euro clearing, the vast majority of which now takes place using UK-based clearing houses. The eurozone’s central bank needed to enforce those rules to guard against a financial panic, he said.
The remarks clash with those of Mark Carney, Bank of England governor, who said earlier on Tuesday that euro clearing could remain in the UK without posing a threat to financial stability.
Brexit has re-opened the rift between the ECB and London over clearing after the European Court of Justice ruled in 2015 that activity could remain in London — against the ECB’s wish to force activity to decamp to the eurozone.
UK-based firms such as LCH now clear around three quarters of euro-denominated derivatives — a process which involves standing between two counterparties to protect one against the risk of default by another.
Mr Cœuré said the rules as they stood were not designed to cope with such a leading clearer operating outside the EU and warned of the threat that posed to markets and the economy within the eurozone.
He backed the proposed changes to the rulebook — now known as the European Market Infrastructure Regulation — which the commission unveiled a week ago and said a review had now become “urgent” to address a situation where the EU had only “very limited tools” to take action in a crisis.
“We need to ensure that we can preserve a framework that ensures the safety and stability of the financial system when the UK is no longer a member of the EU,” said Mr Cœuré. “In this regard, we think the European Commission proposals to amend [the regulation] are a step in the right direction.”
Mr Cœuré then went on to say that the Commission was right to tout a role for the ECB, as opposed to the BoE or national central banks within the EU, in supervising clearing houses given its role as the central issuer of euros.
“I welcome the the fact that the Commission has referred to the role that we should play as central bank of issue: we certainly need to play a strong role here,” he said.
Mr Carney warned on Tuesday morning that fragmentation of global derivatives markets through a change in rules would undo some of the benefits of central clearing.
“Fragmentation is in no one’s economic interest. Nor is it necessary for financial stability,” he said, adding that the Commission’s concerns could be addressed through “common standards and co-operative oversight”.