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London's Euro Clearing at Risk in Spat Over Internal Markets Bill

City of London lion

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The EU could soon announce a delay to the decision on allowing City of London financial institutions the right to continue clearing Euro transactions for EU-based clients following Brexit, due to concern over Britain's plan to breach its Brexit divorce settlement.

The claim was reported by Reuters, quoting "a derivatives industry source".

The move comes amidst escalating tensions between the UK and EU which has cast a shadow of uncertainty over the prospects of the two sides agreeing a post-Brexit trade deal by 2021, in turning creating a backdrop conducive to declines in Sterling.

The threat is significant given the importance of the financial services sector to the UK economy, but it is also worth noting the decision poses significant risk to EU businesses that rely on London for FX clearing.

London is by far the biggest foreign exchange market in the world with data showing the UK commands 43% of the global volume of foreign exchange transactions, with New York - its nearest rival - only commanding 16.5% of global currency trade.

The EU doesn't have the market depth to replace London and therefore the move appears to be a high-risk play in the ongoing spat over the UK's decision to publish domestic legislation that would override elements of the Withdrawal Agreement signed in late 2019.

The European Commission said on Thursday September 10 the EU would give the UK until the end of September to withdraw legislation that it says seeks to undermine the Withdrawal Agreement reached between the two sides in 2019.

If the UK fails to drop the legislation, or retract the offending elements of the legislation, trade negotiations could be called off.

So far it looks as though the UK government is pursuing the contentious Internal Market Bill which easily passed its first stage in the House of Commons on Monday night with a majority vote of 77.

The passing of the Bill therefore puts the EU and UK on course for a month-end clash, which is when the EU deadline expires. 

European Commission Vice-President Maroš Šefčovič attended an extraordinary meeting of the EU-UK Joint Committee in London on Thursday to discuss the UK government's draft publication of the United Kingdom Internal Market Bill.

Following the meeting the Commission said existing clauses in the Bill that relate to Northern Ireland would break "a legal obligation" if passed.

"The EU does not accept the argument that the aim of the draft Bill is to protect the Good Friday (Belfast) Agreement. In fact, it is of the view that it does the opposite," read a statement released by the EU Commission.

Šefčovič requested the UK government to withdraw the offending measures contained in the draft Bill in the shortest time possible "and in any case by the end of the month".

If not, "the European Union will not be shy in using" "a number of mechanisms and legal remedies to address violations of the legal obligations contained in the text".

It appears the decision to review London's Euro clearing status is a shot across the UK's bows on what sanctions the EU is considering, and further threats are likely over coming days.

The previous week saw the UK pass the Internal Market Bill which is designed to secure the functioning of the UK's internal market from the start of 2021 when the country exits the Brexit transition period. In doing so, the Bill seeks to overturn some elements of the Withdrawal Agreement reached between the EU and UK in December 2019, leading to interpretations that the UK is effectively willingly breaking international law.

(This is not strictly true, the law would only be broken if the UK exercised powers given to it by the Internal Market Bill, which would be at some point in the future).

The UK says the move is necessary to ensure the future sanctity of the country amidst claims that the EU could use the Withdrawal Agreement to effectively ban the import of goods from the rest of the UK into Northern Ireland.

The claims made by the UK stem from the observation that the EU has not guaranteed that Great Britain would be added to their approved third-country food import listings despite the EU and UK currently operating on perfect alignment.

By not including Great Britain on the list the EU would effectively break up the UK's internal market.

"It has been made clear to us in the current talks that there is no guarantee of listing us. I am afraid it has also been said to us explicitly in these talks that if we are not listed we will not be able to move food to Northern Ireland," said UK Chief Negotiator David Frost in a terse Twitter exchange with his EU opposite Michel Barnier on Sunday.


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