Bank of England boss Andrew Bailey has fired the latest salvo in the tug of war with the EU on financial services, warning it would “resist very firmly” any move to seize control of the lucrative euro derivative trading market.
The Bank’s governor told MPs on the Treasury Select Committee that pressure from Europe on banks to shift their so-called clearing activity out of London would be a “very serious escalation” of the issue and of “dubious legality”.
His comments come after reports suggest Brussels has been ordering major banks to explain why they are not shifting euro derivatives trading out of London.
The questionnaire sent to lenders has been seen as a bid by the EU to take control of the euro clearing market, worth a staggering 735 trillion euro (£658 trillion) a year.
London is the leader in clearing, with the London Stock Exchange’s LCH business dominating the market.
Controversial
Mr Bailey said to move clearing over to Europe would require about 25% of the market to shift there, but that would still not be viable and would likely see the EU look to grab the remaining 75%.
“So it becomes a question about how could it get the other 75%?
“That would require something very controversial,” he said.
He said that if the EU was using regulatory pressure on firms to shift activity out of London, it would be “highly controversial and that would be something that we would have to, and want to, resist very firmly”.
He added the move of clearing to the EU would be a potential financial stability concern in the UK and said it appeared to have nothing to do with securing “equivalence” on regulations.
The Treasury is currently taking the lead on the issue, with support from the Bank, according to Mr Bailey.
Brexit
Britain and the EU are working to secure a memorandum of understanding that should create a framework for financial regulation between the two in the hope it will grant London more access following Brexit.
But negotiations appear to have been fraught, with Mr Bailey recently warning in his Mansion House speech that the UK will not be forced to follow EU banking regulations and must be allowed to set its own independent rules.
He said at the time it would be “unrealistic, dangerous and inconsistent with practice” warning the UK is unlikely to agree to EU demands that rules are followed for several years.