In a provocative regulatory salvo fired as Brexit talks begin, the European Commission is preparing to issue legislative proposals in June that would heavily restrict London’s ability to host one of its flagship financial businesses. [...]
A draft commission policy communication, seen by the Financial Times ahead of its publication 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.
It notes that Britain’s exit will have a “significant impact” on oversight arrangements because it will play 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 €850bn a day.
For non-EU operators “specific arrangements based on objective criteria will be necessary to ensure that, where CCPs [central clearing counterparties] play a key systemic role for EU financial markets . . . they are subject to safeguards provided by the EU legal framework”. the paper states. “This includes, where necessary, direct supervision at EU level [and/or] location requirements.” [...]
Officials are considering a system of thresholds to determine if a non-EU clearing house should face increased European oversight or other measures, according to people familiar with the debate. This could allow current EU-US agreements to remain unscathed, if transatlantic activity does not change significantly.
Clearing houses handling bigger volumes of EU business would, at a minimum, be subject to more intrusive EU supervision, including access to data so that European authorities can monitor risk. This may cover smaller operators in London.
Most controversially, the commission is weighing whether to set conditions that would automatically require LCH.Clearnet, the biggest London-based clearing house, to relocate operations if it wants to handle the same level of euro-denominated trading. [...]
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