U.K. Government Plans to Sue ECB Over Location Policy for Clearing Houses
By Gonzalo Vina and Jim Brunsden – Sep 15, 2011 5:33 AM ET
Britain will sue the European Central Bank over plans to prevent some euro-denominated securities from being cleared outside the 17 countries that share the currency, in the first such move by a government.
The U.K. will present a legal challenge against the ECB over its location policy for clearing houses at the European Court of Justice in Luxembourg today, the Treasury in London said in an e-mailed statement yesterday.
“It does seem to indicate a possible change in the approach that the U.K. is taking to Europe,” Darren Fox, a financial services lawyer at Simmons & Simmons LLP, said in a telephone interview in London. “There has been a perception in the City that the U.K. hasn’t been doing as much in Europe as it could have done to protect the interests of the U.K. financial- services industry. Perhaps this is a sign that the worm is turning.”
It’s the first time any European government has sought to sue the ECB, the Treasury said. The U.K. is accusing the central bank of going against principles of the European Union single market and contravening European law amid wider international efforts to regulate derivatives markets.
A spokeswoman for the Frankfurt-based ECB declined to comment.
The ECB’s policy “contravenes European law and fundamental single market principles,” the U.K. Treasury said. “The government wants to see this resolved swiftly and without involving the courts but if necessary will not shy away from continuing legal action.”
A change to the ECB’s location policy would force some London-based houses that clear euro-denominated products to relocate to a euro-region country. The ECB originally put forward its plan a decade ago and made the proposal again a month ago.
The development comes as London Stock Exchange Group Plc (LSE) holds talks with LCH.Clearnet Group Ltd. to buy all or part of the world’s biggest clearing house for swaps, as increased global regulation makes the business more profitable.
Clearing houses such as LCH.Clearnet and Deutsche Boerse AG’s Eurex Clearing operate as central counterparties for every buy and sell order executed by their members, who post collateral, reducing the threat from a trader’s default.
European Union governments have discussed giving clearing houses access to central-bank liquidity as a way to prevent them from collapsing and causing a financial crisis.
The ECB has said clearing activities should take place in the euro region if it is expected to provide such financial support.
The European Commission, the 27-nation EU’s executive arm, said last year that access to central bank liquidity could be useful in preventing clearing houses “becoming a source of risk to the financial system in themselves.” It included the idea in proposals it made in September 2010 to push trading of over-the- counter derivatives through central clearing.
“I don’t think the U.K. has a foot to stand upon,” Karel Lannoo, chief executive officer of the Centre for European Policy Studies, a Brussels-based policy group, said in a telephone interview.
“Overnight liquidity is only given by the ECB to banks in the euro zone, and that’s for financial stability reasons,” Lannoo said. The ECB is simply applying the same principle to clearing houses, he said.