LONDON, June 13 (Reuters) - 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, a source close to the situation said.
The financial industry has warned that forced “relocation” would split markets, bump up trading costs and diminish the status of the euro - as well as threaten thousands of jobs in the City of London.
The draft law due to be published later on Tuesday 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, the 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.
The European Central Bank and euro zone 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 the bloc in 2019.
Under the 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, the source said.
This would mimic how U.S. 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 such as the ECB.
At present, national supervisors oversee clearers.
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 taking the final decision on relocation.
The European Commission decided not to include any quantitative criteria for “systemic” clearing houses, such as caps on clearing volumes, 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 clearing of euro-denominated derivatives 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 companies.
Bank of England officials have warned that euro clearing could shift to New York, but the EU law would mean that if a U.S. clearing house became a “systemic” clearer of euro denominated instruments, it too would come under the new rules.
Details of the draft law were first reported by the Financial Times on Monday. (Editing by Alexander Smith)