The Bank of England and other U.K. supervisors may prioritize sterling over the stability of the euro area during a crisis, a lawyer for the European Central Bank told a court today to justify its policy on clearinghouses.
Romano Subiotto, a lawyer representing the Frankfurt-based bank, said the ECB wants clearinghouses handling trades in euros to be based in the single-currency area to defend against a default that “could cause havoc in the euro area” that would be “far more serious than” the 2008 collapse of Lehman Brothers Holdings Inc.
ECB oversight requires “day-to-day monitoring” that it can’t guarantee outside the euro area. The ECB is defending itself against three U.K. challenges to its policy on clearinghouses in a hearing at the European Union’s General Court in Luxembourg.
David Cameron’s government is fighting policies it argues would punish the nation’s financial hub because the U.K. has kept the pound sterling. Britain hasn’t always given “proper consideration to euro policy concerns,” Subiotto told the court, citing U.K. actions during the collapse of broker MF Global Holdings Ltd.
The U.K.’s Financial Service Authority, which was replaced last year, also didn’t consult eurozone central banks or Spanish authorities before it ordered LCH.Clearnet Group Ltd. to “drastically reduce” its exposure to Spanish debt, he said.
The U.K. is arguing that the ECB’s policy requiring clearinghouses handling euro-denominated trades to be located in the 18-nation currency bloc runs a “real risk of retaliatory treatment” that could see fragmentation of clearing along currency lines, said Kieron Beal, a lawyer representing the U.K. government.
Greatest Impact
While the rules have the greatest impact on the City of London, they also discriminate against all 10 EU states that aren’t part of the euro and may increase market risks because “the efficiency of multi-currency clearing will be lost,” Beal told the court.
The U.K.’s challenges are being supported by Sweden. Clearinghouses dealing with several currencies “can’t be hermetically sealed” along sterling or euro lines, Beal said.
The Bank of England may be able to offer support, even its euro reserves, to a U.K. clearinghouse with liquidity problems, he said. Multi-currency clearinghouses “are either viable or not viable,” Beal said. “If not viable for sterling purposes, they’re not viable for euro.”
Banker Bonuses
The hearing at the court in Luxembourg is the latest in a series of U.K. maneuvers against EU responses to the financial crisis, including a possible tax on transactions and curbs on bankers’ bonuses. The U.K. is on a losing streak at the European Court of Justice.
It failed to overturn EU powers to ban short selling and was told that an early challenge against the transaction-tax plan was premature. Cameron last month suffered defeat at the hands of fellow EU leaders who brushed off his vocal opposition to the appointment of Jean-Claude Juncker, the former prime minister of Luxembourg, as president of the European Commission.
A ruling in the cases won’t come for at least several months and can be appealed. The ECB argues that its policy, set out in a paper published in July 2011, is neither binding nor discriminatory.
It didn’t prevent NYSE Euronext shifting its continental derivatives business from Paris to ICE Clear Europe in London in 2012, Subiotto said.
Offshore Payments
Exceptions to the ECB’s principle can apply only in “very specific circumstances,” such as for “offshore payment systems that settle less than 5 billion euros ($6.8 billion) per day, or that account for less than 0.2 percent of the total daily average value” of certain transactions processed by euro-area banks, the ECB paper says.
In practice, the measure cuts off U.K.-based clearinghouses from emergency support and other facilities from euro-area central banks, the U.K. argues. London is a global center for clearing of derivatives trades, including those denominated in euros.
Clearinghouses such as LCH Clearnet, majority owned by the London Stock Exchange Group Plc (LSE), and Deutsche Boerse AG’s Eurex Clearing operate as central counterparties for every buy and sell order executed. Traders post collateral, reducing the threat from a trader’s default.
LCH Clearnet’s SwapClear platform handles more than 95 percent of the overall market for cleared, over-the-counter, interest rate swaps, according to data on its website.LCH.Clearnet declined to comment on the court case.
Euro denominated contracts account for about 45 percent of the notional outstanding amount of trades on the platform. Other central clearers with operations in London include CME Clearing Europe and ICE Clear Europe.
bloomberg.com
Romano Subiotto, a lawyer representing the Frankfurt-based bank, said the ECB wants clearinghouses handling trades in euros to be based in the single-currency area to defend against a default that “could cause havoc in the euro area” that would be “far more serious than” the 2008 collapse of Lehman Brothers Holdings Inc.
ECB oversight requires “day-to-day monitoring” that it can’t guarantee outside the euro area. The ECB is defending itself against three U.K. challenges to its policy on clearinghouses in a hearing at the European Union’s General Court in Luxembourg.
David Cameron’s government is fighting policies it argues would punish the nation’s financial hub because the U.K. has kept the pound sterling. Britain hasn’t always given “proper consideration to euro policy concerns,” Subiotto told the court, citing U.K. actions during the collapse of broker MF Global Holdings Ltd.
The U.K.’s Financial Service Authority, which was replaced last year, also didn’t consult eurozone central banks or Spanish authorities before it ordered LCH.Clearnet Group Ltd. to “drastically reduce” its exposure to Spanish debt, he said.
The U.K. is arguing that the ECB’s policy requiring clearinghouses handling euro-denominated trades to be located in the 18-nation currency bloc runs a “real risk of retaliatory treatment” that could see fragmentation of clearing along currency lines, said Kieron Beal, a lawyer representing the U.K. government.
Greatest Impact
While the rules have the greatest impact on the City of London, they also discriminate against all 10 EU states that aren’t part of the euro and may increase market risks because “the efficiency of multi-currency clearing will be lost,” Beal told the court.
The U.K.’s challenges are being supported by Sweden. Clearinghouses dealing with several currencies “can’t be hermetically sealed” along sterling or euro lines, Beal said.
The Bank of England may be able to offer support, even its euro reserves, to a U.K. clearinghouse with liquidity problems, he said. Multi-currency clearinghouses “are either viable or not viable,” Beal said. “If not viable for sterling purposes, they’re not viable for euro.”
Banker Bonuses
The hearing at the court in Luxembourg is the latest in a series of U.K. maneuvers against EU responses to the financial crisis, including a possible tax on transactions and curbs on bankers’ bonuses. The U.K. is on a losing streak at the European Court of Justice.
It failed to overturn EU powers to ban short selling and was told that an early challenge against the transaction-tax plan was premature. Cameron last month suffered defeat at the hands of fellow EU leaders who brushed off his vocal opposition to the appointment of Jean-Claude Juncker, the former prime minister of Luxembourg, as president of the European Commission.
A ruling in the cases won’t come for at least several months and can be appealed. The ECB argues that its policy, set out in a paper published in July 2011, is neither binding nor discriminatory.
It didn’t prevent NYSE Euronext shifting its continental derivatives business from Paris to ICE Clear Europe in London in 2012, Subiotto said.
Offshore Payments
Exceptions to the ECB’s principle can apply only in “very specific circumstances,” such as for “offshore payment systems that settle less than 5 billion euros ($6.8 billion) per day, or that account for less than 0.2 percent of the total daily average value” of certain transactions processed by euro-area banks, the ECB paper says.
In practice, the measure cuts off U.K.-based clearinghouses from emergency support and other facilities from euro-area central banks, the U.K. argues. London is a global center for clearing of derivatives trades, including those denominated in euros.
Clearinghouses such as LCH Clearnet, majority owned by the London Stock Exchange Group Plc (LSE), and Deutsche Boerse AG’s Eurex Clearing operate as central counterparties for every buy and sell order executed. Traders post collateral, reducing the threat from a trader’s default.
LCH Clearnet’s SwapClear platform handles more than 95 percent of the overall market for cleared, over-the-counter, interest rate swaps, according to data on its website.LCH.Clearnet declined to comment on the court case.
Euro denominated contracts account for about 45 percent of the notional outstanding amount of trades on the platform. Other central clearers with operations in London include CME Clearing Europe and ICE Clear Europe.
bloomberg.com
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