Britain Sues Europe’s Bank

ECB plans to prevent clearing euro-denominated securities outside euro zone

Britain is taking the European Central Bank (ECB) to court on Thursday at the European Court of Justice in Luxembourg, the first time a government has taken such an action. At issue is the ECB’s location policy for clearing houses; it says that, if it is to provide overnight liquidity for euro-denominated securities, trades must take place within the euro zone and not within the broader European Union (EU).

Bloomberg reported that the EU has discussed allowing clearing houses to have access to ECB liquidity to provide greater stability; the ECB’s position, on the other hand, is that if it is to provide such funding, clearing activities should take place within the euro zone. Such a requirement could mean that some clearing houses based in London would have to relocate to a euro zone nation if they were to continue to clear euro-denominated securities.

While the issue is not new—the proposal was originally made by the ECB ten years ago—it was brought up again in the last month. And it comes just as the London Stock Exchange Group is in discussions with LCH Clearnet Group Ltd. on the possible purchase of all or part of the world’s biggest clearing house for swaps.

Britain’s Treasury, in its suit, says that the ECB policy “contravenes European law and fundamental single market principles,” and added, “The government wants to see this resolved swiftly and without involving the courts but if necessary will not shy away from continuing legal action.”

Last year the European Commission had said that access to central bank liquidity could be useful to prevent clearing houses “becoming a source of risk to the financial system in themselves.” The idea was incorporated into proposals made in September of 2010 to get over-the-counter derivative trading processed through central clearing.

Karel Lannoo, chief executive officer of the Center for European Policy Studies, a Brussels-based policy group, was quoted in the report saying, “I don’t think the U.K. has a foot to stand upon. Overnight liquidity is only given by the ECB to banks in the euro zone, and that’s for financial stability reasons.” The ECB simply sought to apply the same principle to clearing houses, he added.

 

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