By Huw Jones
LONDON (Reuters) – The City of London financial district’s preferred option for future trading relations with the European Union after Brexit won’t work, a senior EU lawmaker said on Wednesday.
The City has called for two-way market access based on a system of “mutual recognition”, in which Britain and the EU accept the broad thrust of each other’s financial rules.
But Danuta Huebner, a member of the European Parliament’s economic affairs committee, said mutual recognition would reduce the EU’s ability to set its own financial rules.
“Our problem is that we see this system… might endanger the regulatory autonomy of the European Union,” Huebner told the annual FIA IDX derivatives conference.
“We believe that the best basis for the future EU-UK relationship in the field of financial services would be equivalence,” Huebner said.
Equivalence refers to the bloc granting market access if it deems that the rules in force in a non-EU state are aligned with its own. Britain has ruled this out, saying it is a one-way process that can be withdrawn at short notice.
The European Parliament has a veto over any future EU-UK trade deal. Huebner also heads the parliament’s constitutional affairs committee, which will have a key role in determining the assembly’s stance on Brexit.
Britain wants a bespoke free trade agreement (FTA) with the EU that includes financial services to avoid relying on equivalence.
“We believe a free trade agreement cannot solve all the issues of financial services, so there will be this equivalence,” Huebner said.
There is a need to protect consumers and to safeguard financial stability and a single EU rulebook, which would be difficult with financial services in an FTA, she added.
Brussels has already taken 200 equivalence decisions and they have worked relatively well for third countries or non-EU states, she said.
But Britain will not be like other third countries as it is a huge market on the EU’s doorstep with numerous interlinks that require “enhanced equivalence”, she said.
“We have to have additional elements in equivalence which ensures close cooperation between supervisors,” she added.
Huebner is now steering a draft law that includes such enhanced equivalence measures through the European Parliament.
It would require joint supervision of major foreign clearing houses that want access to EU customers – or else clearing in euro-denominated contracts, currently dominated by LCH (L:LSE) in London, would have to relocate to the bloc.
Britain sees this as an attack on the City of London’s role as a global financial center, and American regulators are also watching closely for any interference as U.S. clearing houses serve EU customers as well.
Huebner, who is Polish and a former European Commissioner, said more EU supervisory input in clearing would not mean the bloc was taking powers away from foreign regulators.
But Jochen Metzger, a director in Germany’s Bundesbank, said he was skeptical that such supervisory cooperation could work in practice, and that customers of LCH could consider using clearing houses inside the EU, such as Germany’s Deutsche Boerse (DE:DB1Gn).
“Supervisory cooperation is wonderful in fair weather, but in a crisis situation it gets a bit dicey,” Metzger said.
The U.S. Commodity Futures Trading Commission already has a supervisory cooperation agreement with the Bank of England regarding LCH and said it worked well.
“I am a firm believer in the ability of people acting in good faith to work well in fair weather and foul,” said Brian Bussey, CFTC clearing division director.