Euro-Clearing after Brexit (cepStudy)

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Derivatives contracts in the EU are increasingly being cleared via central counterparties (CCPs). A large proportion of this clearing, particularly for euro-denominated derivatives contracts ("euro clearing"), is carried out by clearing houses in the UK - outside the EU since Brexit. A study by the Centre for European Policy (cep), supported by Deutsche Börse, considers efforts to relocate euro clearing to the EU to be necessary.

cepStudy

"Brexit and its consequences have set alarm bells ringing in the EU and led to increased efforts to bring clearing activities specifically to the EU", says Freiburg-based cep financial expert Philipp Eckhardt, who authored the study with Berlin-based cep expert Anastasia Kotovskaia. In late 2023, the EU Parliament and Council each adopted their positions on the legislative proposals on euro clearing. An agreement is to be reached between the Member States and the European Parliament by the European elections in June 2024.

"Measures to relocate euro clearing transactions from the UK to the EU represent a serious encroachment on entrepreneurial freedom and could be perceived as protectionism", comments Eckhardt. They therefore require sufficient justification and appropriate calibration.

According to the cep scientists, such justification is certainly given. Brexit has revealed risks for the EU that should not be underestimated, for example in relation to financial stability, dependence on third countries, the avoidance of liability risks for the EU and monetary policy transmission. In addition, there is a lack of powers on the part of the EU supervisory authorities to effectively counter such risks. “Increased efforts are therefore required to transfer euro clearing activities to the EU, also with regard to the EU's strategic autonomy agenda”, says Kotovskaia.

To this end, the EU should adopt a market-orientated approach, but insist that market participants in the EU take effective and verifiable measures to relocate their business to the EU. "Only then is there a real chance that resilient and competitive EU clearing markets will emerge in the medium term that can coexist with the global and UK clearing markets", explains Eckhardt.

The cepStudy outlines a total of ten dedicated guardrails for a realignment of the existing EU legal framework, which should be taken into account in the upcoming trilogue negotiations.