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various implications this could have on the posttrade landscape alongside potential unintended consequences that may arise for firms .
A battle for clearing The battle to win euro-denominated derivatives clearing activity , a business worth some $ 660 trillion , is one of the fiercest between UK and EU regulators . Currently , London is the home to derivatives clearing , with most of the activity going through LCH . Despite moves from Eurex , the Frankfurt-based exchange group , to lure activity from London , LCH has maintained its hold of the market .
A temporary 18-month equivalence for UK clearing houses was enacted in September 2020 , enabling LCH to continue providing euro-denominated clearing services from January 2021 until June 2022 .
However , tensions are heating up between regulators , and it appears equivalence will not be extended beyond 2022 . In February , the Bank of England ’ s Andrew Bailey warned over a “ serious escalation ” in relations with the UK if Brussels attempts to force banks to move all clearing of euro-denominated derivatives from London to the Eurozone .
In his speech to the UK Treasury Committee , Bailey highlighted how the consequence of no further equivalence decisions at the end of the 18-month period would mean that a quarter of euro-derivatives clearing would move from the UK to the EU .
This 25 % chunk of euroderivatives clearing is not a “ viable ” amount for the EU to process , Bailey explained to MPs . “ The reason is , particularly in an activity like clearing where the efficiency really comes from having a very big pool of derivatives that can be netted and cleared down , by splitting that pool up the whole process becomes less efficient and having the smaller part of the pool would be even less efficient ,” he said .
“ The clearinghouses also involve a certain level of cross-currency netting to go on and that would break down as well .”
To obtain the remaining threequarters of total euro-denominated derivatives activity , Bailey said the EU could potentially “ force or cajole banks and dealers to say there will be some other penalty unless you move this clearing activity into the EU ”.
This , he warned , would create “ a very serious escalation of the issue ” and was something that the UK should “ resist very firmly ”.
Activity has not yet shifted from the UK , as banks await clarity on what is to come .
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