Andrew Bailey has warned the European Union against mounting a raid on the City of London, saying the Bank of England will “resist very firmly” any moves by Brussels to force financial trading worth trillions of pounds to relocate following Brexit.
Amid growing speculation that EU officials could demand more financial business moves within its borders after leaving, Bailey said steps forcing the relocation of euro derivatives clearing away from the UK would represent a “serious escalation”.
Addressing MPs on the Commons Treasury committee, Bailey said Brussels appeared to be moving towards a position where euro-denominated derivatives clearing would be forced to take place within the eurozone.
“To get that by fiat would require something very controversial such as an attempt at extraterritorial legislation, or an attempt to force or cajole banks and dealers to say there will be some other penalty for you unless you move this clearing activity into the eurozone,” he said.
“Quite bluntly, that would be highly controversial and it would be something we would have to and want to resist very firmly.”
The dispute centres on the clearing of trades in the vast €681tn EU derivatives market – products bought by professional investors to protect against, or speculate on, movements in financial markets; including the price of shares, bonds, interest rates and currencies.
London dominates the market for clearing – which is a central component of the financial system, sitting in-between deals and ensuring trades are completed even if one side of the transaction goes bust.
Bailey said some 75% of around €83.5tn in clearing positions now held at the London Stock Exchange’s LCH clearing house, the biggest in the market, are not held by EU counterparties, meaning the EU should not be targeting them.
Boris Johnson’s Brexit deal entered into at the start of this year did not include an agreement on financial services, which powers the economy of London and helps contribute 10% of the UK’s taxes, leaving firms at risk of being cut-off from the EU following the end of the transition period on 31 December.
Trading in EU shares and derivatives has already left Britain for the continent, with Amsterdam overtaking London as Europe’s largest share trading centre after the first month. Although largely a symbolic blow, experts warned it could be followed by the City losing jobs as well as more business in future.
The UK and the EU are aiming to reach an agreement on cooperation over financial services regulation by March. It comes after the EU had temporarily agreed to grant equivalence to the UK’s financial regulations after the end of the Brexit transition to enable trading to continue in the euro derivatives market, in an agreement due to expire at the end of June 2022.
Brussels has been working to tempt banks to transfer clearing within the EU after Brexit, as it seeks to cut the bloc’s reliance on a financial centre which now sits outside its borders. Reuters reported on Tuesday that Europe’s top banks have been sent letters asking them to justify why they should not have to relocate the activity, applying renewed pressure.
Bailey warned the plan would fragment the derivatives market and push up the cost of trading, saying that the pooling activity in a single location resulted in economies of scale. “In an activity like clearing where the efficiency really comes from having a very deep pooled of derivatives,” he said.
“To break that down would increase cost, no question of that.”
The comments represent Bailey’s latest intervention after attacking EU demands for City banks to comply with Brussels rules earlier this month, in a combative speech backing the government’s hardline stance in the next round of Brexit talks.
Speaking online at the annual Mansion House dinner to finance industry executives, Bailey said the EU had granted equivalence status – a mutual recognition of each side’s regulatory standards – to Canada, the US, Australia, Hong Kong and Brazil based on their adherence to international regulations, but was insisting that London also track the twists and turns of EU rules.
“The EU has argued it must better understand how the UK intends to amend or alter the rules going forwards,” he said.
“This is a standard that the EU holds no other country to and would, I suspect, not agree to be held to itself. It is hard to see beyond one of two ways of interpreting this statement, neither of which stands up to much scrutiny.”