LONDON (Reuters) - Britain must copy European Union rules if it wants to keep the clearing of euro-denominated financial contracts in London after it leaves the EU, Bundesbank executive board member Andreas Dombret said on Thursday.
Britain will have to negotiate new trading terms with the EU, and financial services firms in London currently depend on EU “passports” for accessing the bloc’s single market.
The European Central Bank has wanted clearing houses for euro-denominated financial contracts to shift to the euro zone, arguing it is the lender of last resort in euros. London based LCH Clearnet LSE.L dominates this activity at present.
Dombret told the British Bankers’ Association annual conference that if post-Brexit Britain operates under rules different to those in the bloc, maintaining euro-denominated clearing in London would be challenging.
“I would find it hard to believe that governments and taxpayers would stand behind a policy they have no control over,” Dombret said. “I would expect changes.”
Clearing houses across the EU comply with derivatives rules known as EMIR, he later told reporters. “Right now, the precondition is to follow EMIR and that is very clear.”
Bankers expect the ECB to revive its location policy on euro-denominated clearing after Brexit.
“There is no doubt in my mind the ECB will want that under its wing,” David Folkerts-Landau, group chief economist at Deutsche Bank, told the conference.
Dombret was alluding to an alternative to full passporting, a system known as equivalence. This refers to a clearing house - or bank - in London having access to the EU market if it complies with rules and standards of supervision that are effectively the same as those in the bloc.
On day one of Brexit, Britain would almost certainly be equivalent given it would be applying EU rules until then, and those rules will also be transposed into UK law.
But granting “equivalence” is at the discretion of the EU’s executive European Commission and the designation can be withdrawn at short notice.
This is why equivalence is a “poor shadow” of full passporting as it covers a narrower range of services and comes with higher costs, BBA Chief Executive Anthony Browne said.
“I recently heard that the French Treasury told a group of banks it was trying to persuade them to move to Paris, but although the UK might have to be granted equivalence initially, the question was how quickly they can force the UK to lose equivalence,” Browne said.
Mark Garnier, a government trade minister, told the conference that Britain must find a mechanism that offers passport style access with safeguards to the equivalence regime.
“We have to find a mechanism that behaves like passporting and has greater security than equivalence,” Garnier said.
British Brexit Minister David Davis was quizzed on Thursday in parliament on securing the future of the euro-denominated clearing industry.
“It is certainly one of our major aims,” he said, adding that he wanted to make sure regulatory equivalence in that field was maintained.
On Wednesday, City minister Simon Kirby said that the future of London’s financial clearing business would be a significant consideration in Britain’s negotiations on leaving the European Union, but probably not a top priority for the government. [nL8N1CP3C0]
Additional reporting by William James and Kylie MacLellan; editing by Mark Heinrich
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