BoE's Bailey calls EU's clearing plans a threat and of 'dubious legality'

Bank of England Governor Andrew Bailey said the EU could risk financial stability if it pursues plans to relocate the "eye-wateringly" large euro clearing business in London to the bloc.

In a statement to the U.K. Parliament's Treasury Select Committee, Bailey warned that if London's derivatives clearing houses were forced to move their euro-denominated clearing operations to the EU, the implications would be grave.

He said euro clearing is done in London for reasons of market efficiency, which served clients, but the EU was apparently insisting that 25% of euro clearing, which is carried out by EU counterparties, should move to the EU while also now looking at forcing the remaining 75% of euro clearing positions, which are not held by EU counterparties, to move within the bloc. He said the EU apparently regarded just 25% of the business as potentially unviable.

Reports earlier in the week of Feb. 22 said Europe's top banks were being asked by the EU to justify why they should not have to shift all euro clearing activities to within the bloc.

Bailey raised the issue as part of an update on the EU's moves on granting full equivalence to the U.K. post-Brexit. Such a move, unilaterally granted by the EU, would see the bloc accept that U.K. financial regulations were the equivalent to its own. The EU has granted a temporary equivalence regime to the U.K. for clearing for a further 18 months.

Bailey said for U.K.-based LCH Group Holdings Ltd., outstanding euro derivatives clearing amounted to around €83.5 trillion, which is about 27% of total clearing in LCH.

"So, the question then becomes not a question about equivalence but how the EU can get the other 75%? To get the other 75% would require, by fiat, something very controversial such as attempt at extraterritorial legislation or an attempt to force or cajole banks and dealers [by saying] there will be some other penalty for you unless you move this clearing activity into the euro area," Bailey said. "That seems to be where the debate is heading."

He described such moves as "highly controversial" and of "dubious legality" and said the BoE would want to resist such moves "very firmly."

"It is certainly something we would be concerned about as a financial stability authority because clearing has come into the foreground as a financial stability tool since the financial crisis," Bailey said.