Treasury files second legal challenge to ECB clearing house location policy

The ECB's proposed 'location policy' will prevent central counterparties (CCPs) that handle more than 5% of the market in a euro-denominated financial product outside the eurozone.

The UK filed an initial lawsuit against the plans with the European Court of Justice (ECJ) last autumn. It claimed that the policy would force CCPs based in the City of London, including leading independent exchange house LCH.Clearnet, to relocate to a eurozone country.

Confirming that the Treasury had filed a "further technical challenge" to the proposals, a spokesperson said that there had been "no change" to the Government's position.

"The Government continues to believe the ECB's proposed 'location policy' contravenes European law and fundamental single market principles by preventing the clearing of some financial products outside the euro area. We hope to resolve this issue swiftly but will continue with legal action if necessary to ensure a level playing field," he said.

Proposed standards for CCPs (13-page / 1MB PDF), published by the ECB in November, could allow it to continue to apply the policy even if the Government's original challenge was successful, the Treasury said.

It added that restricting the clearing of euro-denominated products to firms based in eurozone countries would "undermine the euro's standing as a truly global currency".

According to Government figures, 40% of global over-the-counter derivatives trading and 75% of European trades currently take place in London. On its website, LCH.Clearnet indicated it was in 'exclusive discussions' with the London Stock Exchange. A deal between the two bodies could value the company at almost £1 billion, according to a report in the Daily Telegraph.

A clearing house sits in the middle of a trade between two parties. It assumes the counterparty risk, ensuring financial performance of the trade if one of the parties to it does not meet its commitments.

The ECB detailed its plans to prevent clearing houses outside the eurozone from dealing in euro-denominated financial products in a policy paper (13-page / 271KB PDF) published in July. The ban applies where the daily credit exposure of a non-eurozone clearing house is above €5 billion, or 5% of the market.

The policy paper claimed that requiring major clearing houses to be based within the eurozone was necessary to provide traders with "safety and efficiency", as the ECB's powers to regulate CCPs are restricted to eurozone member states.