The European Commission is rushing out proposals to impose EU control on the City of London's lucrative euro-clearing market, forcing UK operators to either relocate or be policed by European authorities.
In a provocative regulatory salvo fired as Brexit talks begin, the commission is preparing to issue legislative proposals in June that would heavily restrict London's ability to host one of its flagship financial businesses.
The powerplay by the commission will be a setback for London, which fought hard for six years to fend off French-led attempts to relocate euro clearing to the single currency area. Although French and German finance ministers have warned that Brexit makes London’s euro-clearing dominance unsustainable, this hasty intervention goes further, threatening a legal fait accompli to enshrine location restrictions even before Britain leaves the bloc.
A draft policy communication, due to be published on Thursday, supports “more centralisation of supervision” of clearing houses across the bloc if they provide “critical capital market functions” of systemic importance for the EU.
The paper notes that Britain’s exit will have a “significant impact” on oversight arrangements because it plays an outsized role in capital markets beyond the EU’s regulatory regime. London processes up to three-quarters of global euro-denominated derivatives, clearing a notional €850 billion a day.
‘Direct supervision’
The proposal adds that non-EU operators would, where necessary, require “direct supervision at EU level [and/or] location requirements”.
Clearing houses such as Deutsche Börse's Eurex and LCH, which is controlled by the London Stock Exchange, are crucial parts of the financial system, standing in the middle of trades between buyers and sellers and managing the situation when a counterparty defaults.
British ministers see warnings to relocate clearing as impractical, economically unwise, and likely to boost New York as a financial centre. Philip Hammond, UK chancellor, has warned that it would be at a "huge cost" to the European economy.
Some senior EU officials, by contrast, see no point in “wasting time” on unrealistic ideas in Brexit talks. They intend the proposal to send a strong early signal so the City can prepare to move operations to the EU as needed.
Most controversially, the commission is weighing whether to set conditions that would automatically require LCH, London’s biggest clearing house, to relocate operations if it wants the same level of euro-denominated trade.
A report by EY late last year estimated that there could be 83,000 related job losses in London over the next seven years if euro clearing was forced out of the City.
-(Copyright The Financial Times Limited 2017)
