Court Overturns ECB Policy on Clearing Houses

The European Union’s (EU) second-highest court has supported the UK’s challenge to the European Central Bank (ECB) policy that euro clearing houses should be based in the single currency area.

The General Court said it had annulled the policy published by the ECB, which required clearing houses to be located in the 19 country eurozone. “The ECB does not have the competence necessary to impose such a requirement,” stated the Luxembourg-based court.

The UK government, seeking to protect London’s status as a global financial hub, mounted the challenge as it feared that big clearinghouses such as LCH Clearnet might come under pressure to shift some of its euro-denominated operations to rival cities in the Eurozone, such as Frankfurt and Paris.

The UK claimed that the ECB’s policy went against the single market. “We have been consistently clear there needs to be a level playing field for all countries in Europe’s single market, whether they are in the eurozone or not,” said chancellor George Osborne.

The ECB said that it will carefully examine the judgment and decide on its future actions. It had claimed that having clearing houses that daily handle more than €5bn of euro-denominated securities inside the eurozone would make intervention easier if they got into trouble.

However, the court said such a policy went beyond oversight to actually regulating market infrastructure companies, a power that the ECB does not have under the EU treaty. If the ECB wanted to regulate clearing houses it should request the EU give it such powers, it added. The ECB could still appeal this verdict, on legal points, to Europe’s top court, the European Court of Justice (ECJ), which is also in Luxembourg.

The decision was welcomed by the UK employers’ body the Confederation of British Industry (CBI). “This is a landmark judgment upholding the EU’s single market, setting the boundaries of what the ECB can do to support the eurozone without the agreement of non-euro member states,” said CBI director-general John Cridland.

“As our biggest market, it is in the UK’s interest for the eurozone to take necessary steps to strengthen the currency union, but that integration cannot and should not compromise the principle of the single market.

“As the race for shares of global financial markets intensifies, we need to protect our competitive advantage and this ruling gives certainty that financial services should flow freely within the EU without restrictions, which is good for the UK.”

The win is also timely for the UK government after it lost a challenge to EU rules on short-selling shares and withdrew an objection to the EU’s cap on banker bonuses.

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