Moved to Monday because of Crown Prince Guillaume’s accession to the throne, from Friday the Council of Government validated a bill transposing the so-called “Emir 3” package. Behind this regulatory jargon lies a strategic reform: the European Union wants to repatriate to its territory part of the derivatives clearing market, which is still largely concentrated in London. According to the European Securities and Markets Authority (ESMA), more than 70% of euro swap contracts are currently cleared by the British clearing house LCH.
The new scheme, known as the Active Account Requirement (AAR), will require certain financial counterparties exceeding certain exposure thresholds (€3bn in interest rate derivatives, for example) to open an operational account with an EU-authorised clearing house, such as Eurex in Germany or LCH SA in Paris. These accounts will have to be fully functional and used for a ‘representative’ proportion of transactions. The idea is to have an anchor in the Union so that flows can be quickly redirected in the event of a crisis or a breakdown in access to UK CCPs.
For Brussels, the benefits are clear: to reduce the systemic risks associated with external dependence, to strengthen the strategic autonomy of the eurozone and to support the European clearing ecosystem. But the reform has given rise to heated debate. Trade associations, such as EFAMA for asset managers and ISDA for banks and brokers, are warning of the risk of additional costs and market fragmentation.
Simulations point to significant effects. EFAMA has shown that a European fund clearing a €10m swap at Eurex, with a spread of four basis points over LCH, could withstand a price differential of €40,000.
ISDA, for its part, lists a series of indirect costs: legal due diligence, adapting IT systems, opening additional margin accounts, and even recruiting new intermediaries. These costs, which are sometimes difficult to pool, will fall mainly on medium-sized players and investment funds.
The debate also concerns the real effectiveness of the system. Critics argue that artificially imposing a share of transactions on EU CCPs risks fragmenting liquidity, widening price spreads and exposing counterparties further in times of stress. EFAMA has warned that margin differences between London and Frankfurt could result in unpredictable and volatile costs.
Luxembourg, where many international funds and banks manage derivatives portfolios, will be watching developments closely. The Luxembourg financial centre could be doubly affected: on the one hand, its players will have to adapt their clearing infrastructures and absorb additional costs; on the other, it could benefit from a rebalancing towards EU CCPs, offering greater regulatory certainty.
There is more than just a technical issue at stake. It is a question of whether Europe is prepared to pay the price – in liquidity and competitiveness – to secure its financial sovereignty. The transposition of Emir 3 in Luxembourg thus marks a decisive step in the construction of a European clearing market that is less dependent on the UK.