EU lawmakers struggle to compromise on post-Brexit derivatives clearing

European Union lawmakers were deeply split on Wednesday over plans to force the relocation of euro derivatives clearing from post-Brexit London to “EU soil”, raising the prospect of ending up with diluted rules that banks are lobbying for.

The European Commission has proposed a draft law requiring banks in the EU to open “active accounts” at an EU-based clearing house to clear a yet-to-be-determined number of contracts such as euro interest rate swaps (IRS).

Clearing of euro denominated IRS is dominated globally by London Stock Exchange Group (LON:LSEG)’s LCH arm in London, a source of concern for some EU policymakers since Britain’s departure from the bloc.

Voluntary efforts to persuade EU banks to shift clearing to Deutsche Boerse (ETR:DB1Gn) in Frankfurt have made only modest headway.

Danuta Huebner, a centre-right member of the European Parliament, which has final say with EU states on the draft law, is the lead lawmaker and has proposed a two-stage approach: banks would be required to have an active account initially, with quantitative thresholds considered later on.

That seeks to straddle splits in parliament that range from deleting the active account requirement, to the Left and Greens wanting accounts with rising thresholds and fines for banks that fail to meet them.

“I remain convinced that a phased approach addresses the shortcomings raised by the proposals tabled,” Huebner told a meeting of the economic affairs committee on Wednesday.

Banks argue that being forced to shift large chunks of euro clearing from London to EU clearers would deny them access to deep pools of liquidity in London and damage their global competitiveness.

“We cannot support a two-stage approach as it stands,” said Jonas Fernandez, a centre-left lawmaker. “Yes, the implementation of these active accounts will have a cost for the actors of the sector, but this cost is very far from being problematic or prohibitive.”

Dorien Rookmaker, from the right in parliament, said the active account proposal should be deleted because EU market share in clearing should be increased by competition and not by imposing rules that would make the sector “less competitive and lazy”.

The committee aims to vote on an agreed position in early November before opening talks with EU states on a final deal.

Britain’s clearers have EU permission to continue serving EU customers until end June 2025, though few believe they will be cut off entirely after then.

EU lawmakers struggle to compromise on post-Brexit derivatives clearing