EU derivatives decision leaves London in the lurch

EU derivatives decision leaves London in the lurch
London touts itself as the go-to location for trading derivatives, but its dominance may end as the EU looks to reduce its reliance on core financial services. (AFP)
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Updated 26 November 2020

EU derivatives decision leaves London in the lurch

EU derivatives decision leaves London in the lurch
  • This will mean that branches of EU banks in London face conflicting EU and British requirements on where to trade derivatives

LONDON: London’s dominance of the multi-billion dollar derivatives market is at risk after a European regulator said on Wednesday that banks in the EU will have to use trading platforms within the bloc once Britain fully leaves the EU on Dec. 31.

The City of London’s unfettered access to the EU, its biggest customer, ends when Brexit transition arrangements expire and Brussels wants trading in euro-denominated derivatives to remain within its jurisdiction or in a country with “equivalent” standards to the bloc.

The Paris-based European Securities and Markets Authority (ESMA) on Wednesday confirmed that EU investors would have to use a swaps platform inside the bloc, or based in a non-EU country that has already been granted “equivalence” or permission, such as the US from Jan 1.

This will mean that branches of EU banks in London face conflicting EU and British requirements on where to trade derivatives.

The City of London touts itself as the go-to location globally for trading derivatives — the life blood of financial markets, allowing investors to bet on a swathe of assets and hedge risk.

While the rules would not create the sort of systemic disruption of areas such as clearing the contracts, which has already been smoothed over with temporary equivalence, it does signal the EU is prepared to play hardball as Brexit injects a sense of urgency into reducing its reliance on the City of London for core financial services for its economy.

“ESMA acknowledges that this approach creates challenges for some EU counterparties, particularly UK branches of EU investment firms,” the watchdog said.

Britain’s Financial Conduct Authority said it will not be adjusting its approach to derivatives trading at this time.

“Mutual equivalence would be the best way to avoid market disruption and meet international G20 commitments. We continue to monitor developments,” it said.

The derivatives industry has urged Brussels to avoid a clash in rules through a “quick fix” legal workaround, but it now appears this was not possible.

The rules mean British counterparties will have to use a UK authorized platform, while EU counterparties have to use an EU authorized platform, making a trade between the two sides impossible.

The ESMA said it did not see room for providing different guidance “based on the current legal framework, and in the absence of an equivalence decision by the European Commission.”

Trade talks between the EU and Britain do not cover financial services, though a deal could help the mood music toward financial services access.


France wants end to US-Europe trade spat

France wants end to US-Europe trade spat
Updated 17 January 2021

France wants end to US-Europe trade spat

France wants end to US-Europe trade spat
  • All eyes on President-elect Biden to resolve disputes between partners

PARIS: The EU and the incoming administration of US President-elect Joe Biden should suspend a trade dispute to give themselves time to find common ground, France’s foreign minister said in remarks published on Sunday.

“The issue that’s poisoning everyone is that of the price escalation and taxes on steel, digital technology and Airbus,” Jean-Yves Le Drian told Le Journal du Dimanche in an interview.

He said he hoped the sides could find a way to settle the dispute. “It may take time, but in the meantime, we can always order a moratorium,” he added.

At the end of December the US moved to boost tariffs on French and German aircraft parts in the Boeing-Airbus subsidy dispute, but the bloc decided to hold off on retaliation for now.

The EU is planning to present a World Trade Organization (WTO) reform proposal in February and is willing to consider reforms to restrain the judicial authority of the WTO’s dispute-settlement body.

The US has for years complained that the WTO Appellate Body makes unjustified new trade rules in its decisions and has blocked the appointment of new judges to stop this, rendering the body inoperable.

The Trump administration, which leaves office on Wednesday, had threatened to impose tariffs on French cosmetics, handbags and other goods in retaliation for France’s digital services tax, which it said discriminated against US tech firms.

Overturning decades of free trade consensus was a central part of Trump’s “America First” agenda. In 2018, declaring that “trade wars are good, and easy to win,” he shocked allies by imposing tariffs on imported steel and aluminum from most of the world.

While Trump later dropped tariffs against Australia, Japan, Brazil and South Korea in return for concessions, he kept them in place against more than $7 billion worth of EU metal. The bloc retaliated with tariffs on more than $3 billion worth of US goods, from orange juice and blue jeans to Harley Davidson bikes, and took its case to the WTO.

While Biden promises to be more predictable than Trump, he is not expected to lift the steel tariffs immediately. Even if he wants to, he could run into reluctance from producers in “rust belt” states such as Michigan and Pennsylvania that secured his election win.

Hosuk Lee-Makiyama, director of trade think tank ECIPE, said the US was unlikely to award Europe a “free pass,” noting that countries that had offered concessions to have their tariffs lifted could complain if Europe won better treatment.

Resolving future trade disputes could become easier, if Biden reverses Trump policy that paralyzed the WTO by blocking the appointment of judges to its appellate body.