Britain wins landmark ruling against ECB on banks

Britain has won a legal challenge against European Union powers over the City of London, as judges sided with the UK in a clash with the European Central Bank on clearing houses.

The European Union's second-highest court has ruled the ECB was wrong to insist that euro clearing houses should be based in the single currency area, a policy Britain had challenged.

The General Court said on Wednesday it annulled the policy published by the ECB, which required clearing houses to be located in the 19-country euro zone.

"The ECB does not have the competence necessary to impose such a requirement on central counterparties involved in the clearing of securities," the Luxembourg-based General Court said in a statement.

Mr Osborne said the verdict was 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”.

“We have been consistently clear there needs to be a level playing field for all countries in Europe’s single market, whether they are in the eurozone or not. That’s why we brought a legal challenge against the European Central Bank’s utterly discriminatory location policy, and why we welcome today’s ruling from the European Court of Justice which strikes this policy down,” he said.

Clearing houses stand between the two sides of stock and bond trades, ensuring smooth completion of transactions even if one side of the deal goes bust.

Britain, which is a member of the EU but not the eurozone, had challenged the ECB's policy, saying it went against the EU's single market.

The ECB had said having clearing houses that handle more than €5bn of euro-denominated securities inside the euro zone would make it easier to intervene if they got into trouble.

But the court said such a policy went beyond oversight to actually regulating market infrastructure companies, a power the ECB does not have under EU treaty.

If the ECB wanted to regulate securities clearing houses then it should request the EU to give it such powers, the court said.

"This ruling is crucial for the UK, other non-eurozone countries as well as the eurozone itself," said Raoul Ruparel, head of economic research at Open Europe.

"If the Court had sided with the ECB, there would have been a split in the single market for clearing certain currencies and securities based on where firms were located in the EU. It would put a de facto residency constraint on performing certain financial transactions."

The Bank of England said in a statement that it would continue to work with the ECB to create a "coordinated and shared approach for achieving our common objectives of financial stability and the smooth functioning of financial market infrastructures."

It said it was "important for the safety and soundness of CCPs that they have access to liquidity arrangements in the currencies they clear.

"This is first and foremost the responsibility of the private operators. In addition, access to central bank liquidity can provide a backstop arrangement. The most efficient ultimate source of this backstop liquidity in the event of major market disruption is provided by the network of central bank swap-lines."

Lawyers had said a failure of Britain's legal challenge could force the London Stock Exchange's LCH.Clearnet clearing house to shift large chunks of its euro-denominated operations to continental Europe.

Defeat could also have seen the City of London financial centre losing influence to the euro zone.