Brussels plan to reduce EU’s reliance on UK’s financial sector

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The EU is proposing plans to reduce the EU’s reliance on the UK’s financial sector whilst also boosting the EU’s capital markets. They are proposing to do this via a requirement that derivatives traders utilise accounts at EU-based clearing houses for a proportion of their transactions. This is because currently, €115tn is processed through the City of London. EU officials want a share of the market transactions to occur in the EU to boost their own economy and reduce reliance on the UK whilst also allowing their regulators to have direct oversight of transactions as they will be occurring in the EU.

A clearinghouse is a designated intermediary between buyers and sellers who trade securities. Their job is to validate and finalise transactions which ensure that buyers and sellers honour any contractual obligations they may have such as collecting and maintaining margin monies. They are essentially the middle person that ensures trades are secure and efficient. Examples would be the NYSE and NASDAQ.

A derivative is a contract which derives its value based on the performance of an underlying asset. This underlying asset could be a lot of different things such as stocks, bonds, commodities, interest rates, currencies etc.

With this policy proposal, the EU will be moving business from the UK back to the EU. The implications on the UK market could be detrimental depending on what the actual policy implemented is. However, they have noted that the aim is not to shift all business from the UK to the EU but to diversify.

Currently, the UK is an attractive place to conduct business for investors as new derivatives are quickly authorised. However, the EU will overcome this issue as they will accelerate their current process for new derivatives to be authorised.

References: https://www.ft.com/content/da41d878-2e60-42ca-9b34-945efbef8af4?accessToken=zwAAAYTBfVkMkdPaQdh4LmBCytObNJRe---K9A.MEUCIQDO7SOGI9e1AeLPdTkwTMUCNuKdInDV8n3Qu047nEJCuQIgCU5CrDvTBeezaVFVTvlw6Oesd7d5vqZ144oiZteJ044&sharetype=gift&token=88b1889c-bb46-42d2-942e-84ed8dc3a802