European Regulation of Financial Services

Thursday 15th September 2011 Written Statements

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

The UK Government strongly support international efforts to reform derivatives markets, including increased clearing of derivatives through central counterparties. G20 leaders, Finance Ministers and central bank governors have agreed that reforms to derivatives markets should be implemented in an “internationally consistent and non-discriminatory” way.

On 5 July 2011, the European Central Bank (ECB) published a Eurosystem Oversight Framework¹. This includes a policy that central counterparties that clear euro-denominated credit derivatives above certain thresholds (€5 billion average daily net credit exposure or 5% of certain product categories) must

“be legally incorporated in the euro area with full managerial and operational control and responsibility over all core functions, exercised from within the euro area.”

The UK considers that this policy is contrary to fundamental single market principles and fundamental principles of EU law. It is also discriminatory on the grounds of nationality and runs counter to the EU general principle of equality.

The policy, if implemented, would affect a number of central counterparties that have located their businesses in the UK to provide services in a range of currencies, EU and non-EU; and would lead to a fragmentation of financial markets by currency zone with profoundly negative consequences for the single market, international capital flows and significant costs for the European and global economies.

Accordingly, the UK Government have chosen to challenge the ECB’s Eurosystem Oversight Framework policy, which it considers to have legal effect and therefore can be challenged under the treaty.

¹ The Policy Framework was not published in the Official Journal of the European Union. It was made publicly available through publication on the ECB’s website on 5 July 2011.