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The UK has finally won a key case on financial services at the General Court of the European Court of Justice (ECJ), which this morning ruled in the UK’s favour against the ECB’s desire to limit the clearing of euros outside of the Eurozone, which in effect would have created a two-tier single market. However, important questions remain. Open Europe’s Raoul Ruparel assesses the importance of the ruling and what happens next.
4 March 2015
If the ruling had gone against the UK it would have seriously undermined the single market and significantly increased the power of the ECB – and probably would have made ‘Brexit’ more likely.
On the 5 July 2011 the ECB published its Eurosystem Oversight Policy Framework, which argued that clearing houses based in the UK or other non-Eurozone countries would have to move inside the Eurozone to continue to do business in euros :
As a matter of principle, infrastructures that settle euro-denominated payment transactions should settle these transactions in central bank money and be legally incorporated in the euro area with full managerial and operational control and responsibility over all core functions for processing euro denominated transactions, exercised from within the euro area.
In that paper and future opinions the ECB has stressed that it will not provide central bank liquidity to clearing houses outside the Eurozone but that all such institutions should have access to it.
The UK quickly challenged the policy in September 2011, calling for the ECB’s policies to be annulled, and has launched two further challenges at the ECJ, in which it updates its list of complaints, the key points of which are:
The ECJ (its general Court) fully supported the UK’s request for the Eurosystem Oversight Policy Framework to be annulled. The press release said:
“The General Court annuls the European Oversight Policy Framework published by the ECB in so far as it sets a requirement for CCPs involved in the clearing of securities to be located within the Eurozone.”
“The General Court holds that the ECB lacks the competence necessary to regulate the activity of securities clearing systems as its competence is limited to payment systems alone by Article 127(2) of the FEU Treaty.”
The Court added that if the ECB felt that its role in managing payment systems required the oversight of securities clearing, it would need to request a change to its statute so that the relevant article includes explicit reference to this point.
This ruling is crucial for the UK, other non-Eurozone countries as well as the Eurozone itself:
As we noted before, the ECB does have some validity in its point about financial stability. There is no doubt that more and more transactions are being directed on to exchanges and through central counterparties (clearing houses) therefore it makes sense for them to have access to sufficient liquidity. Then again, the LCH Clearnet clears products in 17 different currencies without the need for central banks backstops in all of them. Furthermore, central counterparties within the Eurozone have always cleared transactions in a variety of different currencies, without access to the relevant central bank’s liquidity. Surely under ECB logic this would have been deemed unsafe? Yet they never made any mention of it or showed any concern. This seems to suggest the decision was more political than about financial stability.
Nevertheless, to rule out any concern our proposal has always been that using the existing Pound/Euro swap lines between the Bank of England and ECB, in a more formal and lasting structure (which can include information sharing on oversight and use of liquidity), is the most sensible and logical way to deal with any concerns around lack of liquidity. We hope that discussions will now move from legal questions to practical ones.
That said, this is far from guaranteed. Since the ruling was made at the General Court, the ECB has the right to appeal. Given the clear and forceful nature of the ruling we would hope this is unlikely. The UK has also lodged two further appeals against the ECB’s action/opinions on this front. These may be withdrawn though we expect it will depend on the action of the ECB.
In the ruling, the Court notes that the ECB has the ability to request a change to its Statute to allow for its role to cover securities clearing. It could request this and as the ruling notes, there is a derogation which:
“Enables the European Parliament and the Council, acting in accordance with the ordinary legislative procedure, and on a recommendation from the ECB or a proposal from the Commission, to amend those provisions.”
This means that changes to the ECB Statute of this nature could be done without full Treaty change and would be decided under Qualified Majority Voting (QMV), meaning the UK could not veto it. However, this looks very unlikely and would be particularly belligerent on the part of the ECB. It’s also not clear that there would be any support for this amongst other member states (other than France and Spain).
One point to note is that, if this dispute does rumble on in some form, the Court has only ruled on the UK’s first plea – that the ECB does not have competence here. It has not directly considered the other concerns (noted above). Any future disputes may take more account of these points, meaning the UK still has plenty of ammunition in the bag.
This whole process has raised some concerning questions about certain players in the EU, particularly when it comes to financial services regulation. While it reflects fairly well on the General Court and its role as an independent arbiter, others have come off less well.
(The full ruling can be found here and the press release here.)