A proposal by the European Central Bank (ECB) to freeze out London's clearing houses from euro-denominated securities will seriously impede the City of London's competitiveness and the UK government is right to sue the Frankfurt-based central bank, according to a leading city lawyer.
The ECB's scheme was revealed in a July policy paper, where the bank sought to prevent some euro-denominated securities being cleared outside the euro countries.
Some 40% of the world's over-the-counter derivatives trading is conducted in London and it is home to major clearing houses, including LCH.Clearnet, which was formed by the merger of the London Clearing House and Clearnet of Paris.
Yesterday the UK government announced it had begun proceedings against the ECB through the European Court of Justice.
Masoud Zabeti, partner and head of finance and banking at law firm Mishcon de Reya, said the British government's case against the ECB appeared to have merit.
“The ECB's policy proposals will have the direct consequence of infringing EU law and treaties that guarantee the free movement of capital and services,” he said.
However, Zabeti did not believe the matter would be resolved by the European Court of Justice.
“The British government is no doubt using the threat of legal action to leverage its position in negotiations with the ECB. Ultimately, this issue will be resolved through a negotiated settlement,” he said.
Nevertheless, the ECB's course of action didn't leave the British government much choice.
“The ECB's arguments for the proposed changes on rules affecting clearing houses do not carry much weight,” said Zabeti. “While the ECB maintains the moves would assist financial stability in the European markets, I am not aware of anything to suggest that London's leading role in the clearing of euro-denominated financial products has contributed to financial instability.”
Mishcon de Reya is a London-based international law firm with offices in New York. It has represented the UK government on legal matters.
The firm also advises the Icelandic government from matters arising from the loan agreements entered into between the depositors and investors guarantee scheme of Iceland and the UK treasury. This followed the collapse of Iceland's major banks.