Last month, leaders from London and Brussels signed a memorandum of understanding (MoU) that establishes a framework for greater cooperation in areas such as regulatory changes, international developments, and risks to financial markets. The first forum meeting will take place this autumn.
Camille Seillès, secretary general at the ABBL, said the agreement is a positive step for the industry. “It sets a framework for discussion. Both sides are committing to a regular twice-yearly meeting to discuss voluntary regulatory cooperation with financial services issues. There will be information sharing and both parties will work together towards meeting joint challenges and coordinate positions.”
Maintaining close ties with the UK after Brexit is critical to Luxembourg’s financial centre, according to Seillès. “Europe’s main financial centre is no longer within the EU because of Brexit. It’s a reality we must accept and in Luxembourg we are taking a pragmatic approach. It is critical that we are still able to rely upon funding liquidity and financial expertise that is available outside the EU and we have this expertise at our doorstep in the City of London.”
Attempts to formalise cooperation in areas such as financial services were previously thwarted due to disagreements between the bloc and Britain over Northern Ireland. Relations improved earlier this year after the Windsor Framework was agreed. Simon Treacy, senior associate at Linklaters in London, believes politics will continue to influence discussions. “The mood music we’ve been hearing from the UK regulators is they continue to cooperate with their counterparts in the EU, but the broader dynamic will be set by the wider politics.”
The MoU certainly puts equivalence back on the agenda, but it will take a much greater thawing of relations before we get to equivalence outside of limited areas where it exists already.
Equivalence back on the agenda
The UK’s departure from the EU single market in 2020 ended passporting and opened the possibility of equivalence in certain financial services areas. Equivalence allows third countries to access EU markets if their laws and supervisory frameworks are deemed equivalent to the EU's, although access is more limited compared to passporting.
James Morris, managing associate for financial regulation at Linklaters, said that while the agreement would pave the way for a more cooperative relationship between London and Brussels, it wouldn’t immediately advance the cause of UK firms being offered access to EU markets on the basis of equivalence.
“For people hoping that it’s going to lead to wide-ranging equivalence in the near term, I think that’s probably over optimistic. The MoU certainly puts equivalence back on the agenda, but it will take a much greater thawing of relations before we get to equivalence outside of limited areas where it exists already,” Morris said.
The MoU explicitly states that discussions held by the forum “will not restrict the ability of either the EU or the UK to implement regulatory, supervisory or other legal measures.” But Morris believes equivalence is no longer a priority for UK businesses. “Despite being without equivalence in key areas for several years, the prospect of attaining it would undoubtedly help business. However, its seismic importance might not be as significant than had we received a promise of broad equivalence decisions before Brexit."
The commission wants a certain percentage of swaps to be cleared at an EU-based clearing house. But we simply don’t have the capacity to clear these huge volumes.
Euro clearing extension still unclear
Debate on clearing for euro-denominated derivatives in the EU is likely to resurface in the coming months. In 2022, the European Commission extended equivalence for UK central counterparties (CCPs) until 30 June 2025. At the time, the commission also began looking at ways to expand central clearing activities in the EU and reduce its overreliance on third-country CCPs, such as in the UK.
The ultimate goal was to shift a majority of euro-denominated clearing to Paris and Frankfurt. However, the commission changed tack last December when it tabled proposals that would require banks to only set up accounts with minimum volume levels at EU clearing houses.
Gilles Pierre, head of banking regulation and financial markets at the ABBL, warned that attempts to clear a majority of euro-denominated derivatives inside the EU risked putting European banks at a competitive disadvantage.
“The reality is that between 90 and 95 percent of euro-denominated interest rate derivative swaps are cleared outside the EU, not just in the UK but in the US as well. The commission wants a certain percentage of swaps to be cleared at an EU-based clearing house. But we simply don’t have the capacity to clear these huge volumes. It would be very expensive for clients and if they feel they are not getting access to the full range of services they could leave their EU bank.”