EU faces French call to fix derivatives to narrow Brexit blow

Brexit EU

France’s top securities governor called on the European Union to revise its derivatives trading rules on Wednesday to evade weakening its financial sector after Britain entirely leaves the bloc at the end of 2020.

Robert Ophele, chair of France’s AMF, said in surprisingly blunt comments by a senior regulator that the rules need adjusting to dodge penalizing branches of EU banks trading in London.

Under its “derivatives trading obligation” or DTO, the EU has said that EU branches in Britain must use an EU-based platform for trading or a platform in a country like the United States that has been approved by the bloc.

London is the world’s biggest center for over-the-counter trading derivatives such as interest rate swaps, widely used by businesses to hedge against unfavorable moves in borrowing costs.

British rules oblige UK counterparties to trade on a UK licensed platform, making cross-Channel deals impractical.

The bloc’s Markets Authority (ESMA) and European Securities said last week the clash was due to how Britain implemented its own rules and only monitored the market.

“If we do so, it will be too late. The harm will have been done,” Ophele told reporters at an online event.

“I do hope that the European DTO can still be quickly adjusted,” said Ophele, who made a similar call a year ago, adding that the EU could grant UK market passage for derivatives trading to replace the DTO rules but that this was unpromising.

He said the bulk of trading narrated by the EU rules is concentrated in London, and that 70% of volumes handled by the EU branches there was at risk of being lost or moved to the United States.

Brussels wants to create a deep capital market to reduce reliance on the City of London. But Ophele said that trying to do this from scratch in derivatives with “no critical mass” of strong players inside the bloc would be “detrimental”, putting the EU at a disadvantage to London.

He also warned that the EU needs to up its game in financial regulation. Britain has “made it clear” it will be more “nimble and agile” from January to strengthen the City of London’s competitiveness.

The bloc could make a start by analyzing its securities rules, Ophele said.

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