France Pushes Derivatives-Clearing Ambitions as Brexit Day Nears

(Bloomberg) -- It’s time for Paris to become a European capital-markets hub.

That’s the message from Bank of France Governor Francois Villeroy de Galhau, who said the French capital should be a center for the clearing of interest-rate derivatives after Brexit. U.K. clearinghouses have a “virtual monopoly” on the lucrative business, and “greater competition is absolutely necessary,” he said.

“We would like to see the development in Paris of an enhanced and extended clearing services offering in the area of interest-rate derivatives,” Villeroy said in a speech in Paris on Friday. And as the market adjusts to Brexit, “Paris is well qualified to become the market hub of this new European constellation,” he said.

The dominance of euro-derivatives clearing by one U.K. firm -- LCH Ltd., a unit of London Stock Exchange Group Plc -- turned the business into a flashpoint in the Brexit talks. France has led the EU push for more clearing to take place within the single market. Clearinghouses stand between the two sides of derivatives trades and hold collateral from both in case a member defaults.

At the beginning of next year, LSE will “fortunately” centralize business for short-term financing contracts -- known as repurchase agreements -- in its French unit LCH SA, Villeroy said.

Villeroy’s comments came as U.K. Prime Minister Theresa May was fighting to win domestic backing for her Brexit deal. The agreement won’t be finalized until leaders sign off on it at a planned summit on Sunday.

While advancing France’s claims to a greater role in EU capital markets, Villeroy also lent his support to an EU plan to prevent a rupture in derivatives clearing in the event of a no-deal Brexit.

The European Commission pledged earlier this month to allow U.K. financial infrastructure firms to continue serving the bloc in the event of a disorderly divorce with no transition period. Equivalence procedures for clearing and securities settlement can be “swiftly deployed” to prevent a market rupture, it said.

“This would obviously have to be a temporary solution, for a period of no more than a year or so,” Villeroy said. The continued market access for U.K. firms should be “tied to a strict timetable” for the adoption of new EU rules on clearinghouse supervision, he said.

©2018 Bloomberg L.P.