Some European politicians argue that the Eurozone needs to control the transactions in Euro. In this process, between two participants of Euro-denominated derivatives must be a mediator in the person of a clearing and settlement organizations as a buyer to all sellers and seller to all buyers. They say Eurozone countries must have the ability to control the amount of the allowance or additional collateral that the clearing house create in case of default of obligations by the parties.
The idea of state control over centralized calculation should cause alarm in the markets. This is very far from reasonable requests for sharing of information by the clearing organizations of the UK and regulators from the EU after Breccia. This is a serious attempt to improve the management of economic instruments in the Eurozone. This scheme will force private markets to work with risk assessment for loans in the Eurozone in accordance with the instructions of the political establishment of the EU. Clearing organizations will not be able to demand additional margin as compensation for the risks for loans in euros, and they will have to be content with what happens in case the agreement of the establishment of the Eurozone with their estimates. Financial markets expect that the premium will determine the operators from the private sector on the basis of nonconflict of credit rating. Regulatory bodies should only establish the parameters of supervision over clearing houses, and how they should work, conducting their costing. However, if this information is known only to the authorities, it cannot be relied upon. The risks increase, because the Euro system is not controlled by a single Supreme authority. This system reflects different national interests, which she and the Euro is vulnerable to sudden changes.
Political concerns due to those cases when acting under the control of the London stock exchange London clearing house, in the opinion of management of the Eurozone too quickly adapts additional reserve liabilities under credit instruments in the Eurozone, which raises doubts about the viability of these loans. But that’s the way markets work. Can be sudden changes in estimates, and these estimates have no relation to the policy and are conducted solely on financial grounds. Markets should not be influenced by political considerations, as otherwise, in the system there is a huge risk.
This is the latest of many attempts to manage market sentiment. The EU has established a centralized control for credit rating agencies. It also established the right of the ban on short selling EU sovereign debt and thereby slow down the gambling, and insurance against losses due to price reduction. Added to this is the ability of Brussels to create an alternate reality, which is that a loan in euros is quite normal, if so decided by the Eurozone authorities. In the end we get a very dangerous situation.
This proposal differs fundamentally from systemic risks arising out of decisions of the organs of the Eurozone on financial stability instruments in euros. It will lead to separation payments in EUR payment in other currencies; and this will reduce the security provided by diversification of currency clearing and settlement organizations. And if the markets can not rely on assessing the viability of loans in the Eurozone, they will do business in other places where the point of view of the authorities and the markets are the same.
This is a very strange proposal, and we are left to speculate about alternative motives. There is not a single mention of the desire of France and Germany to enter via the clearing house for a financial transaction tax given the fact that they, being under the control of the Eurozone, will limit the market’s ability to avoid this tax. Maybe this is the true reason for the proposals.
Barnabas Reynolds is a partner of Shearman & Sterling and author of the book “Scenario Breccia” (A Blueprint for Brexit). In his firm he heads a consulting group of financial institutions and financial regulation. Reynolds gives a complete set of recommendations to financial market participants in their business in the markets of London and Europe. The main focus of his practice he pays to the laws on financial institutions, regulation and legal risk management. Barnabas — leading lawyer in financial regulation in Britain and the EU. It was included in the list of the 100 most popular and reputable lawyers.