EU moves to gain control of key London financial market
The European Union moved Tuesday to tighten its oversight of firms that clear euro-denominated derivatives contracts, threatening tens of thousands of jobs in Britain once the country exits the bloc.
Draft regulations published by the European Commission, the EU's executive body, would force any clearing house considered important to the EU financial system to accept direct oversight from the bloc and, if requested, relocate to inside the EU.
"The continued safety and stability of our financial system remains a key priority," Commission Vice-President Valdis Dombrovskis said. "As we face the departure of the largest EU financial centre, we need to make certain adjustments to our rules to ensure that our efforts remain on track."
Britain dominates clearing of euro-denominated contracts, and one report suggests that losing the market could cost the country 83,000 jobs. Clearing houses act as intermediaries to reduce the risk of default by ensuring funds are delivered to the seller a way of undergirding the financial system.
The proposals are part of the EU's drive to strengthen regulation of the financial industry after risky practices fuelled the global financial crisis that began in 2008. While current EU rules allow the Bank of England to regulate Britain's financial markets, the country's departure from the bloc raises the possibility of new scrutiny from EU authorities.
Clearing firms "have become a systemically important part of the financial sector and their importance is growing," the commission said in a statement. "In addition, the foreseen withdrawal of the United Kingdom from the EU will have a significant impact on the regulation and supervision of clearing in Europe."
About 62 per cent, or US$337 trillion, of derivatives negotiated directly between two parties were settled by clearing firms as of June 2016, according to the EU. Interest-rate derivatives accounted for 97 per cent of these centrally cleared contracts, and three-fourths of euro-denominated interest rate derivatives are cleared in Britain.
While European authorities want euro-clearing to be handled inside the EU to ensure proper oversight, financial services firms around the continent would also benefit by prying the business away from London.