Banks set to resist EU grab for a chunk of clearing business

Good morning and welcome to Europe Express.

Today we’re looking at a post-Brexit issue that has long plagued policymakers in Brussels and is being watched extremely closely in the City of London: whether the European Commission can lure a chunk of financial services to be carried out in the EU.

In Brussels, the European Commission is expected today to formalise its proposal regarding Hungary, recommending that other EU capitals approve Budapest’s recovery spending plans while at the same time proposing to freeze a third of the country’s key structural funds programmes because of lingering corruption. Expect anything but consensus from capitals, which need to approve both moves.

And with EU officials formulating fresh ideas on what to spend funds generated from the sale of carbon permits, we’ll explore how funding generated this way was used so far.

Unclear plans

There’s one financial services issue to which Brussels seems to devote an inordinate amount of time and energy. It’s not banking or share trading but the issue of derivatives denominated in euros and cleared, or risk managed, in the UK, writes Philip Stafford in London.

What’s really behind it are perennial concerns over the financial stability of the eurozone. The issue long predates Britain’s departure from the EU but the eurozone debt crisis and then Brexit supercharged the issue.

Clearing isn’t particularly lucrative, even if the notional value of contracts, quoted in trillions, sounds enormous. What matters is the size of margin posted by market participants to back their trades. That costs billions of dollars every day in real-world assets like cash.

What unique oversight EU regulators can bring has never been explained. Standards are common globally and market crises with clearing houses move far too fast for any regulator to react. In the eye of a storm it would be a central bank that would step in. No matter that the US is comfortable with even more dollar derivatives handled in London; Brussels sees such a vast quantity of euro derivatives in London as intolerable.

Nevertheless for six years there’s been something of a battle between the political will of the EU and the gravitational pull of market economics.

Investors have to post billions of dollars every day in margin for their derivatives but clearing houses consolidate all the deals and subtract offsetting payments against one another. That saves users millions every day and makes inertia an overwhelming incentive. Any change costs extra countless millions of real money every day. Unsurprisingly Brussels’ efforts to break up the arrangement have failed.

That doesn’t mean Brussels is ready to give up. As my colleague Sam Fleming and I wrote last week, the commission is preparing a fresh push to get the market to move at least a portion of the business. The plan is for derivatives traders to clear a minimum amount of business via active accounts in EU-based clearing houses.

The likely impact of the commission’s proposals on Europe’s clearing industry is not yet clear (no pun intended). According to a draft of the plans seen by Europe Express, the commission has not set out what it determines as an “active account”. It will instead push the issue down to the market regulators, to be determined at a later stage.

There is an exemption for intragroup transactions, a potential loophole that lets users funnel business to London via New York. And the draft also keeps the door open to maintaining the status quo. For now London banks and clearing houses are staying relatively sanguine. It could be another year at least before we know whether they are right to be so.

Chart du jour: Russian LNG

Imports of Russian liquefied natural gas, which is typically transported on big tankers, rose more than 40 per cent between January and October this year, compared with the same period in 2021, highlighting the difficulty for Europe in weaning itself off gas from Moscow despite the bloc’s attempts to shift away from Russian sources.

Where does all that carbon money go?

The price of emitting carbon within the EU has increased roughly 12 times since 2013 but that doesn’t mean piles of cash going towards green policies in member states, writes Alice Hancock in Brussels.

The EU’s landmark emissions trading system allows companies to buy credits to cover their pollution output, with the majority of revenues to member states ostensibly destined for spending on climate action.

But research from the WWF published yesterday shows that of the €88.5bn that the scheme raised between 2013 and 2021, only 72 per cent was spent on green initiatives and infrastructure and, even within that, WWF estimates that “at least” €12.4bn went on projects that were counterproductive to environmental efforts such as modernising coal infrastructure or funding fossil-fuel based heating systems.

The paper, which collates data from member states and the European Environment Agency, comes out at a crux in the negotiations to upgrade the existing ETS as part of the EU’s “Fit for 55” climate law, through which the bloc aims to cut emissions by 55 per cent compared with 1990 levels by 2030.

Last night, policymakers from the council, parliament and commission were gathered to thrash out key parts of the new proposal, such as where the money from the ETS goes and how the scheme should cover emissions from the heavily polluting shipping industry.

“It is unfair to the car users if we have many limitations to cars but shipping emissions are not under control,” said Peter Liese, lead negotiator for the parliament, who said the aim was to apply carbon charges to 50 per cent of emissions on trips to and from Europe as well as all emissions for those within the union.

The inclusion of shipping would add a handy extra revenue stream to national governments, which have benefited from a 587 per cent increase in ETS money since the scheme was first introduced in 2013, according to WWF.

But, the NGO warns, where this money goes should be better monitored from the start. At present it’s “impossible” to know where the money is spent, despite the EU’s requesting that at least 50 per cent of it be put towards green policies. “Lax rules mean that national reporting on how ETS revenue was spent is riddled with inconsistencies and mistakes,” the report says.

What to watch today

1. Nato foreign ministers meet in Bucharest

2. EU General Court rules on Hungarian state aid for a nuclear power plant built with Russian technology

Notable, Quotable

Production in most industrial and services sectors has held up very well despite the energy price shock

• Economic rebound: Across Europe, the gloomiest projections for how the war, inflation and the energy crisis would cause a steep economic downturn are starting to be proved wrong. Low unemployment, subsidies, a drop in energy prices and a mild autumn have all improved the outlook.

• ​Taiwan: Nato members held their first dedicated debate on Taiwan in September, the FT has reported, as the US encourages the other members of the transatlantic security alliance to pay more attention to the rising threat to the island from China.​

• Fifteen-year deal: Two deals signed yesterday by state-owned QatarEnergy and US group ConocoPhillips stipulate that Qatar will send 2mn tonnes of liquefied natural gas to Germany annually for at least 15 years, with deliveries expected to start from 2026.