The European Commission will grant an extension for EU banks to access U.K.-based clearing houses for an additional 18 months to ensure a smooth post-Brexit transition, several news outlets reported on Tuesday.
The eurozone economy is still adjusting to the U.K. leaving the European economy, and the commission is taking actions to avoid further disruptions at EU central banks. The post-Brexit transition period is set to expire at the end of 2020, but some adjustments have been made since the spread of the COVID-19 pandemic.
In July, the European Commission disclosed that it was considering extending access to U.K. clearing houses at least into 2021. This was part of a larger decision by the commission to review financial policies that need to be amended or extended beyond 2020.
U.K.-based clearing houses facilitate the exchange of payments, securities or derivatives transactions and prevent defaults from harming the market. Their financial services have become a point of leverage for the U.K. in trade negotiations with the EU.
EU banks depend on access to London’s crucial markets infrastructure through these clearing houses. The commission will soon propose that the access remain undisrupted until mid-2022, according to reports from the Financial Times and Reuters.
The extended access would start on Jan. 1, 2021 and expire on June 30, 2022. The European Commission did not immediately respond to a request for comment.
Without the extension of access, EU banks would have to start divesting their business from U.K. clearing houses starting next month, which would be expensive and risky in the current climate.
There have already been reports of U.K. finance jobs being shifted to other European cities this year as a result of Brexit, and some in the industry have warned that this could continue if clearing house access is cut off at the end of the year.
The commission intends for EU financial institutions to use the extended time to steadily “reduce their exposure to United Kingdom market infrastructures," the Financial Times quoted from a draft proposal.
Banks will need to develop a clear process to scale down their reliance on the U.K., as the commission is concerned with outsourcing oversight of these critical activities. It's unclear when the commission's proposal will be made public, but EU national governments reportedly have until Friday to review the proposal.