The HM Treasury has confirmed the UK is set to legally challenge the ECB over its recently published "location policy", which will require a number of financial infrastructure providers, namely central counterparties (CCPs), that clear OTC credit derivatives to do so only in a eurozone country.
A Treasury spokesperson said: “This decision contravenes European law and fundamental single market principles by preventing the clearing of some financial products outside the Euro area. That is why we have begun proceedings against the European Central Bank through the European Court of Justice.
The move comes during a time of increasing competition among exchanges and clearing houses to provide post-trade services in an environment of regulatory change and dwindling revenues.
The Eurosystem Policy Framework published in July this year sets out the following: "The absolute and relative size of an offshore CCP’s euro-denominated business provides a useful proxy for the potential implications of this CCP for the euro area. The Eurosystem applies thresholds for application of the location policy to CCPs similar to those for payment systems,
"However, taking into account the specific nature of the CCP business, the threshold of €5 billion applies to offshore CCPs that on average have a daily net credit exposure of more than €5 billion in one of the main eurodenominated product categories."
The policy framework notes that the location policy is applied to all CCPs that hold on average more than five per cent of the aggregated daily net credit exposure of all CCPs of the main euro-denominated product categories, chiefly OTC credit derivatives.
The ECB declined to comment.
However, any limit or thresholds contravenes the principles of the single market, said a Treasury Spokesman, as well as undermines the euro's status as a global currency. Additionally, London is one of the world’s leading financial centre, home to 40 per cent of global OTC derivatives trading and some of the biggest clearing houses in the world.
LCH.Clearnet, a UK-based global clearing house in the top three for transactions in interest rate swaps, fixed income and repo and futures and options, had no comment. However, the rule would affect a number of CCPs based outside the eurozone area that provide services in a range of different currencies to clients globally.
The ECB location policy also, according to the Treasury, contravenes international efforts to reform derivative markets, where the G20 called for reforms to be implemented in an “internationally consistent and non-discriminatory way, according to the Treasury.
This statement echoes some of the language in an unreleased draft document of the MiFID review circulating in Brussels, as reported by Reuters. The draft includes rules that would prevent member states from blocking access of investment firms and market operators to central counterparty and clearing and settlement systems.
This UK legal challenge will be the first time a member State has taken legal proceedings against the European Central Bank in this way.
"The Government wants to see this resolved swiftly and without involving the courts, but if necessary will not shy away from continuing legal action to make sure there is a level playing field across the EU for British businesses,” adds the spokesman.
