EU Weighs Incentives, Penalties to Draw Clearing From London

(Bloomberg) -- The European Union is considering an array of measures to reward banks and investors that move transactions to clearing houses in the bloc from London, while penalizing those that don't.

“The markets resist movement because they're obviously afraid of extra cost and maybe disruption,” said Mairead McGuinness, the top financial services official at the European Commission. “We're looking at both incentives, positive ones would be better than negative, but we're very open.”

The EU wants to reduce its dependence on London, which continues to dominate Europe's financial infrastructure even after the U.K. left the bloc. Investors have so far been reluctant to shift trades to far smaller EU clearing houses, a key part of the plumbing that runs through the financial system.

McGuinness, who spoke Wednesday at a conference jointly organized by her institution and the European Central Bank, listed various options to bolster clearing as the bloc analyzes feedback from a recent consultation on the issue. She emphasized the Commission hasn't committed to any specific measures yet and her comments shouldn't be understood as ranking them in preference:

Simplifying the “much longer and more complex procedures” that clearing houses say they need to go through to expand their business in the EU versus other jurisdictions
“Measures to disincentivize clearing” in non-EU countries
“Imposing more specific obligations on market participants” to increase the EU's share of clearing
“The possible role of bank capital requirements in favoring a reduction of exposure to systemic CCPs”
Potential requirements for pension funds and other investors to use EU clearing houses

McGuinness said the EU has addressed the concerns of disruption by extending a temporary waiver that allows its banks and money managers to clear trades in the U.K. through June 2025. The focus is now on making EU clearing houses “more attractive,” she said. The Commission is scheduled to publish its proposals for clearing in the second half of the year.

“This isn't about us trying to take business from the U.K.,” she said. “I see this potentially as a win-win. I don't think it would be healthy if the European Union is over-reliant on any third-country infrastructure in the financial system. A stronger European Union, a stronger capital markets is good for global capital and global capital markets.”