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EU clearing plan will increase costs and reduce liquidity: LSE CEO

Plans by European regulators to increase supervision of clearinghouses outside of the EU will lead to increased costs, less liquidity and reduced efficiency, London Stock Exchange Group Plc's CEO Xavier Rolet said Oct. 17 at a conference in Paris.

The European Commission has set out plans for increased regulation of the clearing of euro-denominated derivatives, including giving itself the power to force the biggest clearinghouses to operate from within the EU, while the ECB wants to increase its own powers to supervise clearing. The moves come in the wake of the U.K.'s decision to leave the EU, with regulators insisting that euro-denominated clearing activities need to move out of London once Britain leaves the bloc to enable European authorities to manage potential risks related to their business. Roughly three-quarters of euro-denominated derivatives, amounting $574 billion a day, are cleared through London.

"The potential proposal to fragment and separate the clearing of euro-denominated derivatives from the rest of the world's market would lead to a deteriorating execution price of somewhere in the region of €20 billion [per annum] in additional costs to EU-based investors," Rolet told the conference, saying the proposals would create a "captive EU market, cutting out liquidity and efficiencies."

He added that the EU should be "mindful" not to isolate the European market when instead it could be playing a role as the creator of a safe and well-regulated market. Some participants had likened the plan to Commodity Futures Trading Commission rules in the U.S., Rolet said, but this was not the case because in the U.S., regulators look only at operations relevant to the country.

In a panel discussion later during the conference, Rolet also said he did not support a financial transaction tax, saying such a tax was detrimental to financial markets and retail investors. France's President Emmanuel Macron recently called for a Europe-wide financial transaction tax.

"Politicians propose it, but they know it really hurts savers," Rolet said, adding that increased regulation had made it "impossible" for retail investors to participate in equity markets. "Let's recalibrate the fiscal environment to remove the disincentives to retail participation," he told the conference.