LONDON, March 4 — Britain scored a rare victory in its bid to challenge European Union powers over the City of London as EU judges sided with the UK in a clash with the European Central Bank on clearinghouses.

The EU General Court in Luxembourg ruled today that the ECB lacks legal powers to dictate the location of the clearing of euro-denominated trades. It said the central bank would require a change in EU law to win those rights.

“This is a major win for Britain and a major win for all those who want to see a European economy that is both open and successful,” said George Osborne, the UK’s chancellor of the exchequer.

The ruling is a timely boost for Osborne and Prime Minister David Cameron ahead of May’s general election. It ends a losing streak in EU court cases over who governs the nation’s financial hub, including a fight over bonus rules for bankers and short selling.

“The ECB lacks the competence necessary to regulate the activity of securities clearing systems as its competence is limited to payment systems alone,” the court said.

The pound strengthened against the euro after the ruling. It traded at 72.53 pence against the single currency as of 10.53am London time, up 0.3 per cent on the day.

Today’s decision concerns the ECB’s policy requiring clearinghouses handling euro-denominated trades to be located in the 19-nation currency bloc, which the UK argued could see a fragmentation of clearing along currency lines.

The ECB told the EU court in a hearing in July that its oversight requires “day-to-day monitoring,” which it can’t guarantee outside the euro area.

Reducing risk

Clearinghouses such as LCH.Clearnet Ltd, majority owned by the London Stock Exchange Group Plc, and Deutsche Boerse AG’s Eurex Clearing operate as central counterparties for trades. Traders post collateral, reducing the risk that a defaulting trader would trigger a succession of further defaults.

“On the face of it, it looks like a positive verdict,” said Daniel Maguire, global head of SwapClear, LCH.Clearnet Ltd’s clearinghouse for interest-rate swaps. He declined to comment further, saying the LSE’s lawyers are still analysing the ruling.

SwapClear handles more than 95 per cent of the overall market of cleared, off-exchange interest-rate swaps globally, according to data on its website. Euro-denominated contracts account for 35.4 per cent of the notional outstanding amount of trades on the platform.

UK role

Other central clearers with operations in London include CME Clearing Europe and ICE Clear Europe. LCH.Clearnet also has approval from the European Securities and Markets Authority to run a clearinghouse in Paris.

The ruling “strengthens the case for Britain remaining at the heart of EU decision-making,” said Catherine Bearder, a UK lawmaker in the European Parliament from the Liberal Democrats, which is in a coalition with Cameron’s Tories.

“Outside the EU, the UK would not have been able to challenge this decision and achieve this result,” she said.

Today’s decision can be appealed to the European Court of Justice. An ECB spokesman declined immediately to comment.

The UK government in November abandoned an appeal against an EU ban on banker bonuses of more than twice fixed pay, a day after an adviser to the bloc’s top court in a non-binding opinion said the EU measure was valid.

Premature plan

Britain has also failed to overturn EU powers to restrict short selling, and was told in April 2014 that an early challenge against a financial-transaction tax plan was premature.

In today’s case, the UK argued the ECB’s location policy for clearinghouses would affect the City of London most and also discriminate against the other EU states that aren’t part of the euro.

The ECB argued that its policy, set out in a July 2011 paper, is neither binding nor discriminatory.

Exceptions to the ECB’s principle can apply only in “very specific circumstances,” such as for “offshore payment systems that settle less than €5 billion (RM20.3 billion) per day, or that account for less than 0.2 per cent of the total daily average value” of certain transactions processed by euro-area banks, the ECB paper says.

In practice, the measure would have cut off UK-based clearinghouses from emergency support and other facilities from euro-area central banks, the UK argued. London is a global centre for the clearing of derivatives trades, including those denominated in euros.

“A win for the ECB in this case would have led to the absurd scenario that only eurozone-located clearing houses could clear euro trades,” said Rob Moulton, a partner at law firm Ashurst LLP in London. “In a globalised marketplace for derivatives, this situation would have stuck out like a sore thumb.”

The case is: T-496/11, United Kingdom v. ECB. — Bloomberg