The European Union is pushing ahead with plans to assert control over the clearing of euro-denominated derivatives, a politically charged step that could force firms to move from London to the EU after Brexit.
The European Commission has drafted a law for firms deemed systemically important to the EU financial system to accept direct oversight by the bloc’s authorities, or be forced to move their euro-clearing operations to a location inside the EU, according to a Bloomberg source.
This so-called location requirement has spurred warnings from the industry of skyrocketing costs and job losses in London. It has also helped to turn clearing into a political football as the EU and UK prepare for divorce negotiations that are set to begin on 19 June.
The push to “bring home” euro clearing, made forcefully by the European Parliament, will clearly be one of the EU’s demands in the Brexit talks, said Guntram Wolff, director of Brussels-based think-tank Bruegel.
“Of course, the location policy is a negotiating instrument,” he told Bloomberg. “You can apply pressure with this. The question is, why would the UK agree to extraterritorial oversight? They haven’t done it so far.”
Tuesday’s proposals are part of an overhaul of the EU’s market-infrastructure law, which sets out rules for over-the-counter derivatives, central counterparties and trade repositories. Specifically, they would beef up EU regulators’ powers over major clearing firms based in financial centres outside the bloc, such as London.
Clearinghouses stand between the two sides of a derivative wager and hold collateral, known as margin, from both in case a member defaults. UK firms including London Stock Exchange clear as much as 75 per cent of euro-denominated interest-rate derivatives.
London Stock Exchange shares rose as much as 3.9 per cent in London trading and were up 3.2 per cent in early trading. Shares of Deutsche Boerse, the owner of Eurex Group, a clearinghouse, were up 0.4 per cent in Frankfurt.
Under the proposals to be announced on Tuesday, the Paris-based European Securities and Markets Authority would determine which clearinghouses are significant enough to be directly supervised, a source said. If ESMA determines that a firm should be subject to the location requirement, the relevant central bank and the commission would have to confirm the decision, they added.
ESMA has pushed for a greater role in policing non-EU firms’ access to the single market, including supervision and enforcement for credit-rating agencies, trade repositories, central counterparties and benchmarks.
The financial industry has lobbied hard against a location policy. In a letter to Valdis Dombrovskis, the EU’s financial services policy chief, the International Swaps and Derivatives Association said a survey of data from 11 banks showed that requiring euro-denominated interest-rate derivatives to be cleared by an EU-based clearinghouse would boost initial margin by as much as 20 per cent.
Forced relocation “would also likely increase capital requirements for EU firms,” ISDA chief executive Scott O’Malia said. “These costs will undoubtedly feed through to clients in both the UK and EU, making it more expensive for them to hedge their risk.”
The Washington-based Futures Industry Association, a trade organisation for the futures, options and centrally cleared derivatives markets, has said forced relocation “could nearly double margin requirements from $83bn to $160bn.”
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