Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2020

Baroness Kramer Excerpts

Thursday 18th June 2020 Lords Chamber

[Baroness Kramer (LD) [V]]

My Lords, I recognise that adopting this SI is sensible and technical. The underlying questions, however, are totally political.

Can the Minister tell us where we stand on equivalence negotiations with the EU on clearance? As the noble Lord, Lord German, reminded us, we are 12 days away from the deadline. The EU, on quite legitimate grounds of financial stability, may well decide to take back into the EU 27 a significant portion of the clearing of euro-denominated derivatives—something it would likely do slice by slice as the 27 build their capabilities. As the Minister pointed out, these regulations in their EU form enhance the power over changing that location. If the EU does so, we lose not only that business but many other wholesale financial market activities that typically collocate. That would be a devastating blow to financial services here in the UK, with knock-on effects on our tax take and public spending.

However, keeping a dominant role in derivatives clearance, with over $30 trillion in exposure in the form of open contracts, is a high risk, frankly—a risk that the EU 27 could legitimately argue that it need not share with us in future. The risk has always been scarily high, but it has increased exponentially with Covid because of the deterioration in the quality of the collateral that stands behind those contracts and is the primary protection against that risk. In her reply, will the Minister address collateral quality and how the deterioration over the past few months as a result of the global economic crisis will be addressed so that we will still be in a reasonable position to manage the exposure created by the major CCPs in London?