Britain has won a landmark legal battle over the place of the City of London in Europe’s single market, forcing the European Central Bank to scrap a policy requiring big clearing houses to decamp to the eurozone.
The suit over the ECB’s so-called “location policy” was a test of whether Britain could remain Europe’s top financial centre and enjoy the full benefits of the EU’s common market while remaining outside the euro.
In Wednesday’s ruling, the EU general court found the ECB “does not have the competence necessary to regulate the activity of securities clearing systems” and therefore cannot force operators to be eurozone based when handling significant euro-denominated business.
While the ruling represents a big victory for George Osborne, the UK chancellor, it was based on relatively narrow grounds, with the court addressing only the first of five pleas in the lawsuit relating to the ECB’s legal powers.
This leaves open the most political and legal sensitive question: whether the ECB policy had discriminated against UK operators or undermined the fundamental freedoms on which the EU single market is based.
These issues could re-emerge, either through an ECB appeal, or in the event of EU legislation to grant the ECB legal authority to oversee the activities of clearing houses. The ECB said it would “carefully consider the general court’s judgment and decide on the way forward”.
Mr Osborne said the verdict against the “utterly discriminatory policy” was a “major win for Britain and a major win for all those who want to see a European economy that is both open and successful”. “We have been consistently clear there needs to be a level playing field for all countries in Europe’s single market, whether they are in the eurozone or not,” he said.
The location policy — while on the ECB books for almost four years — has never been implemented in practice. But it proved a totemic issue for the UK Treasury, which saw it as a defining test of whether London’s financial centre could coexist in a single market with an increasingly integrated eurozone core. The ruling was cheered by UK business groups and industry bodies.
Mr Osborne’s other lawsuits on financial policy have proved far less successful, including those against the EU bonus cap, the financial transaction tax and the power of EU regulators to ban short selling.
Clearing houses are an essential part of the world’s financial infrastructure that concentrate liquidity risk. Any serious disruption to operations would cause huge systemic problems requiring massive liquidity support from central banks.
The ECB argued it would have no influence on a clearing house in difficulty outside the eurozone even though it would potentially endanger payment systems inside the euro area. For this reason it wanted such infrastructure in the euro area when it handled significant euro-denominated business.
The UK argued that the ECB policy was discriminatory; hindered the free movement of capital and services; and infringed on the right to establish cross-border businesses across a multicurrency EU.
There have been unsuccessful on-off attempts since 2011 to settle the location policy case and reach a broader accord between the ECB and the Bank of England over backstop arrangements for clearing houses. On Wednesday both central banks said they had “a co-ordinated and shared approach for achieving the common objective of financial stability and the smooth functioning of financial market infrastructures”.
The judges suggest the ECB could be more explicitly empowered to oversee clearing houses if EU agreed legislation to amend its statute and make that function explicit. The ECB can request such changes, but to become law it requires a European Commission proposal and the agreement of the European parliament a qualified majority of EU member states.
Alexandria Carr, a former Treasury lawyer now at Mayer Brown, said: “This is not just a victory for the UK: it is a victory for all those who believe in the internal market and equal treatment for all 28 EU member states. The European Court has, rather unusually, fired a shot across the bows of the ECB, making it clear that it does not have competence to impose a location requirement on clearing houses.”
She added: “As the European Court held that the ECB did not have the power to impose a location policy, it did not consider the substance of the ECB’s policy decision and so the question of whether the policy unlawfully discriminated against clearing houses and countries outside the eurozone remains unanswered.”
Rob Moulton, regulatory partner at law firm Ashurst, said: “A win for the ECB in this case would have led to the absurd scenario that only eurozone located clearing houses could clear Euro trades. In a globalised marketplace for derivatives, this situation would have stuck out like a sore thumb. Given that we are in an election year, the government will be as relieved as the City that it has avoided an issue that would have given the eurozone pre-eminence over the wider EU.”
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