The European Central Bank and the Bank of England have agreed to co-operate more closely to monitor UK-based central counterparty clearing firms with significant euro-denominated business, bringing to an end to a four-year dispute over whether such entities should be forced to be domiciled in the eurozone.
The two central banks will enhance co-operation and information exchange for CCPs impacted, and in an effort to improve liquidity risk management, have extended the swap line arrangements to facilitate multi-currency liquidity provision to CCPs operating in the UK and euro area.
The arrangement follows a legal challenge brought by the UK after the ECB moved to restrict euro-denominated clearing business to firms based in the eurozone.
As part of its Eurosystem Oversight Policy Framework, published in 2011, the ECB argued that CCPs with daily net credit exposure in excess of €5bn in euro-denominated product categories must be legally incorporated in the euro area, with full operational control and responsibility over core functions exercised in the area.
The central bank argued that firms clearing trillions of euros in transactions could not be appropriately monitored outside of the euro area.
However, the UK launched a legal challenge in 2012, arguing that the proposals breached the EU’s single market rules and could lead to a currency-based fragmentation of Europe’s derivatives markets.
Earlier this month, the Luxembourg-based European Union General Court ruled in favour of the UK’s challenge, noting that the ECB lacked the competence necessary to regulate all activities relating to securities clearing systems, as its competence is limited to payment systems alone.
As the two banks have reached an agreement in the wake of the ruling, the UK has dropped two existing challenges against the ECB.
The resolution provides relief for London-based CCPs, which are poised for significant growth as an impending swap clearing obligation under the European Markets Infrastructure Regulation moves large parts of the US$691trn over-the-counter derivatives market through central counterparties.
LCH.Clearnet’s SwapClear has over US$332trn-equivalent outstanding in euro-denominated contracts. The InterContinental Exchange, which runs its European credit default swap clearing operations from London, currently has €475bn of open interest outstanding across index and single mane contracts in the region.
CME operates its European OTC derivatives clearing effort from the UK.
