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.


Canadian firm pulls out of Carrefour takeover after France insists ‘No’

Canadian firm pulls out of Carrefour takeover after France insists ‘No’
Updated 12 min 5 sec ago

Canadian firm pulls out of Carrefour takeover after France insists ‘No’

Canadian firm pulls out of Carrefour takeover after France insists ‘No’
  • Carrefour has more than 12,300 stores in more than 30 countries and employs 320,000 people worldwide
  • Canada's Couche-Tard has offered to take over the French supermarket giant for 16 billion euro ($19.5 billion)

PARIS: Canadian convenience store chain Couche-Tard has reportedly pulled out of a multi-billion euro takeover of supermarket giant Carrefour after the French government said it would veto the deal.
Negotiations over the 16 billion euro ($19.5 billion) deal ended after a meeting between the French Minister of the Economy Bruno Le Maire and the founder of Couche-Tard Alain Bouchard, Bloomberg news agency said, citing sources.
French ministers had insisted Friday they would not agree to the takeover because it could jeopardize food security, an even more important consideration given the coronavirus pandemic.
In an attempt to reassure ministers, Bouchard had promised to invest billions in Carrefour, said he would maintain employment for two years and that the group would be listed on the Paris Stock Exchange in parallel with Canada, Bloomberg reported.
Contacted by AFP, neither Couche-Tard nor Carrefour had confirmed the information on Friday evening.
Although talks had stopped, anonymous sources cited by Bloomberg said negotiations could resume if the French government changes its position.
But on Friday, France’s Economy Minister made his choice public, telling BMTV and RMC: “My position is a polite, but clear and definitive ‘No’.”
“Food security is a strategic consideration for our country and one does not just hand over one of the large French distributors like that,” Le Maire said.
“Carrefour is the biggest private sector employer in France with nearly 100,000 employees,” he noted, and the group accounts for 20 percent of the food distribution market in the country.
The French statements have not convinced the Canadian government.
A Canadian federal source said while they could understand concerns over allowing a foreign firm to take over such a large national employer, concerns over food security were unsubstantiated.
“But we cannot accuse a leading Canadian company like Couche-Tard of endangering the food sovereignty of an entire country,” the source, who requested anonymity, told AFP.

'Food sovereignty'
On Wednesday, Couche-Tard submitted a non-binding offer for Carrefour, valuing the group at more than 16 billion euros ($19.5 billion).
Le Maire made clear immediately that he was not in favor of a deal involving “an essential link in food security for the French, of food sovereignty.”
The government’s reaction had caused “surprise” at Carrefour itself, according to sources who said the comments were “premature” given that merger discussions had barely begun.
“We haven’t decided yet whether the interest shown is attractive for us,” one company official said on condition of anonymity earlier in the week.
Carrefour has more than 12,300 stores of various formats in more than 30 countries and in 2019 generated a net profit of 1.3 billion euros ($1.5 billion) on revenue of 80.7 billion euros ($97.4 billion).
It employs 320,000 people worldwide.
Couche-Tard has a worldwide network of more than 14,200 stores and earned a net profit of $2.4 billion on sales of $54 billion in its last complete year.
In the United States and several European countries, as well as in Latin America and southeast Asia, it operates under Circle K and other brands.