FRANKFURT (Reuters) - Discord between the euro zone’s three largest countries is stalling the European Central Bank’s efforts to come up with a way to force euro clearing out of London and put it under its watch, three sources told Reuters.
Currently UK clearing houses, particularly the London Stock Exchange’s LCH.Clearnet (LSE.L), guarantee the vast majority of the trillions of euros worth of trades conducted every year and their location will likely be a point of contention in divorce talks between Britain and the European Union.
The ECB and the central banks of the euro zone’s three largest countries - Germany, France and Italy - agree euro clearing needs to move to the euro zone after Brexit but they diverge on who should supervise it, the sources close to the matter said.
The ECB has effectively proposed taking over supervision of the largest clearing houses but national authorities want to have prerogative, as they do currently, the sources added.
“The question is who would supervise, the ECB or the national central banks,” one of the sources said. “There is a risk now that we won’t be able to agree on a proposal and the (European) Commision will decide for us.”
The disagreement risks delaying the European Union’s timetable for making a legislative proposal in June on euro clearing after Brexit. Alternatively it could force the European Commission to make a proposal without ECB input.
The ECB, the Bundesbank, the Banque de France and the Bank of Italy all declined to comment.
The ECB, as the guardian of the euro, currently sits on ‘supervisory colleges’ overseeing London-based clearing houses through EU regulation and agreements with the Bank of England.
But it is afraid of losing its power over these firms, which clear more than 90 percent of all euro derivatives.
This includes ensuring they are managed safely and being able to supply them with euros if they run out of cash.
Asked by the European Commission, the ECB’s Executive Board has drafted a proposal for putting euro clearing under the direct supervision of the Eurosystem, which is comprised of the ECB and the euro zone’s 19 other central banks, the sources said. The proposal, however, contained no preference for any particular location.
This plan, which involves changing article 22 of the Eurosystem’s statute, would effectively force any firm clearing euros to be located in the euro zone and give the ECB, as the bloc’s top banking watchdog, oversight of the largest ones.
But the proposal hit a roadblock last week when it was discussed at a meeting of the ECB’s Governing Council, where board members sit alongside national governors.
The central banks of Germany, France and Italy are resisting this change and favor maintaining the current system, which gives them or national authorities such as Germany’s Bafin the leading role in supervising clearing houses, the sources said.
“We have a system that works so why change it?” one of the sources said.
The three largest clearing houses that currently handle euro trades in the euro zone are Deutsche Boerse’s Eurex in Frankfurt, LCH SA in Paris and Cassa di Compensazione e Garanzia in Rome, with the last two being part of the London Stock Exchange Group.
Instead, these central banks propose adopting a ‘location policy’ for all transactions in euros to be cleared in the EU, with the implicit aim that their own financial centres would benefit.
The ECB should only be given authority over any clearing house still outside the EU via changes to the European Market Infrastructure Regulation that would make that a pre-condition for that firm to access the single market.
The issue will be discussed again at the ECB’s next non-monetary policy meeting on June 21, one source added, warning this may mean missing the Commission’s June deadline and risking that Brussels makes an alternative proposal.
The Commission has said its legislative proposal could include, if necessary, enhanced EU supervision and location requirements.
Even inside individual countries, views are not unanimous.
Some of the sources said the Bundesbank was still split between those, mostly bank supervisors, who favor keeping euro clearing in London and those in the markets department who support moving it to the euro zone.
Bank of England Governor Mark Carney has spoken of an “appropriate” amount of euro clearing remaining in London post-Brexit.
But ECB Executive Board member Yves Mersch said last week Frankfurt should consider taking “action” to keep a grip on offshore clearing for the sake of the stability of the euro.
Additional reporting By Andreas Framke and Andreas Kroener; Editing by Toby Chopra