Leaving the EU: Central Counterparty Clearing

Kerry McCarthy Excerpts

Thursday 1st November 2018 Commons Chamber

[Mr Leslie]

My hon. Friend rightly takes us to the more contemporary story about what is happening with these, because Brexit has put everything in limbo. Will these CCP operations be able to continue to service the vast majority of euro-denominated interest rate swaps or derivative products? The European Union had been developing new supervisory arrangements that would have included the UK. Brexit came along and of course those have all now been put into abeyance because the UK may be taken out of those jurisdictions. Time has ticked on and we are now five months, perhaps less, away from the moment of change, yet we still do not have any certainty about what will happen. However, we have heard various rumours.

Last week, the Governor of the Bank of England, Mark Carney, highlighted £41 trillion-worth of outstanding contracts that could be forcibly voided—that could fall out of legal certainty—if we do not get some sort of arrangement put in place. Earlier in the week, EU Commissioner and Vice-President Valdis Dombrovskis indicated that the EU might allow the UK CCPs after Brexit to operate on a temporary basis, with some strict conditionality. Of course we saw the report in The Times today that perhaps in the negotiations there was some sort of sense in which UK financial services companies, including these CCPs, would be able to operate on an equivalence basis, which is not as good as the arrangements we have, where we are around the table and able to make the rules on regulations. We would be a rule taker, but of course we may be allowed access to European markets—and, potentially, vice versa. The danger with that is that it is precarious and it could be switched off at a moment’s notice if policymakers fell out, for whatever reason.

As my hon. Friend has pointed out, today Commissioner Barnier poured a big old dose of cold water all over that, saying, “You should not believe everything you read in the paper.” He reiterated that it was really in the hands of the EU to decide whether equivalence continued. This would not be an ideal situation at all, and the risk is that we would need to see CCP clearing services develop rapidly in other jurisdictions in Europe. Of course the Americans will have their arrangements, but that could start to undermine the centrality of the UK. That would be a great pity, because the UK has expertise and a relatively good regulatory approach, working with our European colleagues.

So the main question I want to put to the Minister is: what is the Government’s attitude to the future, long-term, stable, permanent regulation environment? Are we going to align ourselves closely or in harmony with the EU regulatory framework for central counterparty clearing arrangements? If that is the case, it would be useful to know that that is British Government policy at this stage, because that might then enable something to be built on equivalence. We could possibly move to a position in which the UK still has a say in the regulatory arrangements.

In my view, the public should be given a chance to think again about this whole thing and, if they want, there should be a people’s vote so that the option to remain is still viable. Nothing has been decided that should prevent that from happening. If we are to leave the European Union, it would not be a good thing to do so and put all these things up in the air. We should not fragment the financial safety regulatory arrangements and potentially put businesses, jobs and livelihoods at risk.

[Kerry McCarthy (Bristol East) (Lab)]

I used to do this sort of thing for a living as a derivatives lawyer, although that is not something to which I own up very often these days. I was working in the City at the time of preparations for the millennium bug, and when the euro came in I was involved in cleaning up the mess after the Barings collapse. With the millennium bug in particular, people said afterwards that it was a big fuss about nothing and that it was totally alarmist and exaggerated for people to say that it was going to cause chaos. What they did not realise was how much work had to go on behind the scenes to make sure that that chaos did not happen. There is a real danger of complacency with situations like the current one, with people thinking that it will all sort itself out. Does my hon. Friend agree?

[Mr Leslie]

I do agree, and I do not think that the work is being done. Frankly, there should be more leadership. We are in a rudderless situation right now. We have a lot of regulators—the Bank of England, the European Securities and Markets Authority and others—but they are of course subservient to the political policy makers, and although I hope that those policy makers are apprised of these issues and know the scale, I am not that confident that they are or that it is high up their agenda. I am not sure that I have heard the Prime Minister talk about these issues, let alone the Chancellor of the Exchequer. Perhaps the Minister will be able to enlighten us on that.

I shall come to an eventual conclusion by explaining why there might be a number of problems. Firms are currently discussing a lot of contracts that are not yet cleared. If we do not have the option of central counterparty clearing—in particular from the European side in respect of whether they can access London—what stability risks will be generated in those scenarios? Will we lose liquidity? If we do, will we see costs going up for businesses? When costs go up for businesses, will they be passed on to customers? That would have a drag effect on the worldwide economy.

The issue for those contracts that are already cleared—that are already in existence—is whether they will still be extant after 29 March, because if a whole load of existing contracts are in place, whether in Europe or wherever, many will have clauses that require notice to be given if their legal validity is due to expire. It could be six months or nine months, but we are now certainly coming into the period in which the holders of those contracts will have to start to give notice and to say, “We are not certain that these existing financial contracts will be viable or in place, because of the risk of falling into legal no man’s land after 29 March.” There is a clear and present risk to the stability not just of our economy or Europe’s economy, but of the worldwide economy. Although this can seem a very dry topic, everybody should stay focused on the hundreds of trillions of pounds-worth of value that might have an effect on the wider economy.

Will the Minister say what we are going to do to come to a swift conclusion—certainly within the next few weeks—on this issue? I know that the UK has made an offer to the EU to allow temporary access to UK firms. The question is obviously whether that is going to be reciprocal, but if we are to offer that, are we going to legislate for it and put that guarantee into law? That could be done right now. I really want to find out the Treasury’s plan. Do we know that the Government care and are taking an interest in the stability of the UK and EU economies, and in businesses, jobs and the livelihoods of all our constituents, who will undoubtedly be affected by this issue?