Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) (No. 2) Regulations 2019

Lord Davies of Oldham Excerpts

Tuesday 1st October 2019 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I agree with my noble friend Lady Bowles that the Explanatory Memorandum needs to be updated to reflect the current circumstances and the current attitude towards our future relationship with Europe. Frankly, that is necessary in order to be fair to the industry, which will be reading all this with a great deal of attention, because the various aspects of this statutory instrument obviously have a very big impact on its businesses, what they are able to do and how they need to adjust to cope with any kind of Brexit, should it happen. I want to pursue a slightly different direction from my noble friend, however, and ask about the divergence that seems to be embedded in this statutory instrument. I ask for a very particular reason: your Lordships will be well aware that the London Clearing House is now well set up in Paris as well as in London; that there has been a major shift by many of the big banks to centre a lot of their trading activity through Paris; and that undoubtedly, should Brexit happen, that will be enhanced and there will be increased activity in Paris covering essentially the same business range when it comes to derivatives and over-the-counter derivatives. There will be an equivalent central counterparty functioning almost as a rival body, so the embedded divergence in this statutory instrument becomes important, perhaps as a bellwether for the future, and I would like to probe the Minister on it.

It strikes me, first, that paragraph 2.8 explains:

“Some of the provisions of the REFIT amendment to EMIR do not become applicable until after 31 October 2019 … Therefore, this instrument does not make amendments to those provisions”,


to incorporate those changes, as it were. I would love to know the content and significance of those amendments and how they will impact the shape of the industry. The CCPs or the regulators will need to behave in a different way if we have an embedded divergence that would come into effect in a matter of days. I would find that information rather helpful and perhaps the Minister would be kind enough to enlighten me.

That brings me to paragraph 2.16. As my noble friend Lady Bowles said, it states:

“EMIR, as amended by REFIT, allows the Commission to suspend the clearing obligation for up to twelve months in three-month increments”.


The new equivalent power, to be handed to the Bank of England, chooses to allow the Bank to suspend for up to 12 months—in other words, not following the pattern of three-month increments. It sounds like a minor difference, and it possibly is, which raises the interesting question: why choose to embed a divergence? Could it leave us in the rather peculiar situation that one CCP in Paris—ironically, under the same ownership as the CCP in London—could be operating under different rules when it comes to suspending obligations? Is that a situation we want to see? Is this to be an area of competitive rivalry? What will the impact be? It seems to me that encouraging companies or funds to play regulatory arbitrage is never the healthiest strategy to pursue. Perhaps the Government could explain, because I would just like to understand it better.

There is another odd area where apparently, inconsistency will remain in the future. Paragraph 2.17 explains that within the European Union,

“Any suspension of the clearing obligation that impacts classes of derivatives with a trading obligation must result in the trading obligation also being suspended to avoid a conflict”.

That seems entirely logical, but apparently that is not going to carry over into the UK. There will be no automatic suspension of the trading obligation. It sounds like the FCA will then be responsible and the Bank will then have to notify the FCA of its intention to make the clearing obligation suspension, rather than the link being an automatic one. It strikes me as cumbersome and inefficient and I wonder why it is being chosen.

Perhaps the Minister, as he finishes, will just explain this. Although the embedded divergencies are minor, they certainly can be played by financial institutions. Given the rapid growth of Paris, picking up business that was almost exclusively being done through London, it is probably best for this House to understand.

[Lord Davies of Oldham (Lab)]

My Lords, I apologise to the noble Lord, Lord Bethell, and to the House for having missed the first couple of minutes of his significant words, but I think I could pick up from the way in which he developed his theme exactly the position of the Government on this complex area. The Minister’s answers to the questions and anxieties of the two noble Baronesses from the Liberal Democrat Benches will certainly help us to understand his position.

I hope that the noble Lord is enjoying his Front-Bench debut on the EU exit SIs. It has been a fairly onerous task. As far as my own contribution is concerned, my noble friend Lord Tunnicliffe, who normally joins me in economic debates, is unfortunately not able to be here today, otherwise he would have added to the absolutely excellent work that he has done over a long period of time in successive discussions on these almost endless SIs. However, I thought it right that he should have a certain amount of time off, and he has gone to an event at which his wife is a star figure who is being given an award, so I am not surprised that he is on duty there rather than here today. However, he has had the advantage of having scrutinised about 50 of these Treasury SIs—and of course the Minister will have taken steps to catch up with all that.

This instrument makes several changes to both the Financial Services and Markets Act 2000 and relevant pieces of retained EU law to ensure consistency with the UK’s obligations under the EMIR REFIT regulation, which came into effect earlier this year. We do not regard these changes as controversial, and therefore we support the instrument. However, we will look for elucidation and clarification of certain parts of how it will work. I am grateful to the noble Baronesses who have already spoken for having identified important areas in which the Minister needs to respond.