The European Union plans to give itself powers to move euro clearing business away from London’s financial sector to the EU after Brexit and to adopt a model closer to that operated by the United States.
The draft law would, as a last resort, force euro-denominated clearing business to shift from London to the bloc if the volume was deemed by Brussels to be systemically important, a source said.
The bulk of clearing in euro-denominated derivatives is done in London, and involves a third party standing between two sides of a trade to ensure its smooth and safe completion.
In this country, the roll of clearing houses was highlighted during the crash, when clearing houses insisted on taking deposits to handle trades in Irish government bonds
The European Central Bank and eurozone policymakers have long wanted control over euro clearing, saying it is core to the single currency area’s financial stability and would be outside the EU’s regulatory sphere once Britain leaves.
Under a new draft law, if ESMA decides that a non-EU clearer is handling “systemically” important volumes of euro denominated business, a system of “enhanced supervision” would be introduced.
This would mimic how US regulators already have direct oversight of clearing houses in London that clear dollar-denominated instruments, such as having direct access to sensitive data.
The first aim of the law is to centralise supervision of EU based clearing houses, with the bloc’s European Securities and Markets Authority (ESMA) taking the lead, backed by central banks. The second builds on the existing system of “equivalence”, whereby a non-EU clearer can serve customers in the bloc if it complies with rules that are similar to the EU’s.
“If enhanced supervision does not work because it is so systemic, then there can be a decision to require relocation. That is a last resort,” the source said.
ESMA would have to make a recommendation, with the European Commission having the final say.
The European Commission decided not to include any quantitative criteria for “systemic” clearing houses, relying on a “case-by-case” approach by ESMA.
The draft law will need approval from EU states and the European Parliament.
Most euro-denominated clearing of derivatives is done by a unit of the London Stock Exchange, whose head said on Monday that relocation would have little financial impact as it has a clearing house in Paris that is fully authorised under EU rules.
A global derivatives industry body warned on Monday that shifting euro clearing from London to the European continent would require banks to set aside far more cash to insure trades against defaults, a cost that would be passed on to firms.
Bank of England Governor Mark Carney, pictured, has said that the UK wants to guarantee an “appropriate amount” of euro clearing business stays in the City.
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