Britain and France have a long history as partners, but also as rivals. Any friction that occurs between the nations inevitably carries with it the whiff of Agincourt, Waterloo and Mers-el-Kebir, when the British sank the French fleet. So it was with some apprehension that the City of London last month greeted the news that a Frenchman would be the new European Commissioner for the Internal Market and Services, the post that oversees the EU market for financial services. Michel Barnier, a former French agriculture minister, has been named as Charlie McCreevy’s successor. Hours into the job and some in the City were beginning to fear the route the European Commission might take into the derivatives markets next year. Greater capital requirements and taxes, more reporting, greater oversight and the shift of all OTC derivatives on to exchanges could be on the agenda.
The disequilibrium between the traditional preoccupations of the City of London and the European Commission doesn’t help. Whereas the City is interested in the preservation of the integrity of wholesale markets, the Commission is much more interested in protecting the retail buyer. Together, both needs are not easily satisfied. To add even more spice to the situation, the UK is likely to have a change of government in 2010, and however softly Conservatives David Cameron and George Osborne are treading at the moment, their party is likely to be even less tolerant of European meddling in the London markets than the current Labour government. But the City should have a good idea of where Europe stands on the issue of derivatives clearing. McCreevy’s approach to the delay in implementing a central clearing house for CDS showed that Europe meant business. The banks had promised to install a central counterparty by the end of 2008 and, by early February this year when this had still not happened, McCreevy lost patience and threatened to mandate a CCP through legislative action. He said that the industry had “pulled out of an agreement at the last moment and now a regulatory approach is necessary”. Looking down the barrel of a gun, the industry got its act together and central clearing, chiefly through ICE Clear Europe, got under way at the end of July. Moreover, not only have European regulators demonstrated that they are prepared to play hardball with the industry, they have also demonstrated a secular and protectionist bias. It was exactly a year ago that the governing council of the European Central Bank suggested that there should be a single European clearing house for CDS, and that, ideally, this institution should be located in the eurozone. This preference has been repeated several times, most notably by French finance minister Christine Lagarde. To want a European solution for what is a global product is odd; to want a eurozone-only solution for a product of which 43% is traded in London seems even more odd. City lobbyists say that European regulators don’t have an answer to this conundrum. One recounts asking a regulator whether a euro-denominated credit default swap traded by an Australian bank on the Asian Development Bank would be cleared by a eurozone CCP or not. He didn’t get a response. What seems far more likely is that the European Commission wants to accrete power for itself. It would have regulatory power over a European clearer and could claim a seat at the high table of global financial regulators. It must find it particularly irksome that the most successful CDS clearer so far is ICE, way beyond its regulatory reach. So all of this carries ominous bodings for the City as 2009 ends and a new year of regulation dawns. Could all OTC derivative trades be forced on to an exchange? Even worse, might every financial trade executed carry a tax? At the moment, no one knows. After all the sniping of the past year, a kind of phoney war exists between bankers and regulators. The fog of politics shrouds the next likely gambit by European regulators. Bankers have not been publicly vocal about their fears; no one wants to hear special pleading by fat cat bankers, especially at the moment. But a series of end-users have pleaded with European politicians not to make derivatives too costly to use. There are several factors that might console the market. What worries derivatives bankers most is that the capital required to support trading activities will be set at too high a level and will stymie business. But this decision lies beyond the scope of the European Commission and sits with the Bank for International Settlements. It is also possible that events will simply move on and European bureaucrats will find something else to get interested in. After the financial crisis of 2008, it was understandable that those in charge of the rules would seek to prevent it happening again. But other events may quickly assume greater importance and supersede the financial crisis. Neither is it likely that European regulators will kill the golden goose of the City of London, however much sabre-rattling is done. After the Congress of Vienna, which concluded the Napoleonic Wars, the European great powers, led by Britain and France, entered a new period of co-operation and conciliation called the Congress System, and later the Concert of Europe. One hopes that this proves an influential historical model for Europe an regulators.