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EU to tighten grip on euro clearing after Brexit - source

Reuters  |  LONDON 

By Huw Jones

(Reuters) - The European Union plans to give itself powers to move euro business away from London's financial sector to the after Brexit and 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

The draft law due to be published later on Tuesday would, as a last resort, force euro-denominated business to shift from to the bloc if the volume was deemed by Brussels to be systemically important, the source said.

The bulk of in euro-denominated derivatives is performed in and involves a third party standing between two sides of a trade to ensure its smooth and safe completion.

The European Central Bank (ECB) 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 the European Securities and Authority (ESMA) decides that a non-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 houses that handle dollar-denominated instruments, including direct access to sensitive data.

The first aim of the law is to centralise supervision of EU-based houses, with ESMA taking the lead, backed by central banks such as the ECB.

At present, national supervisors oversee clearers.

The second aim is to build on the existing system of "equivalence", whereby a non-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 relocation recommendation, with input from the ECB, but the European Commission would take the final decision.

The European Commission decided not to include quantitative criteria for "systemic" houses, such as caps on volumes, leaving ESMA to make assessments case by case.

Simon Gleeson, a regulatory partner at international law firm Clifford Chance, said there is no question of UK being forced to relocate.

"The issue is whether and to what extent the wishes to prevent banks from euro trades outside the EU," Gleeson said.

"I think what is really going on here is the trying to create a bargaining chip that it can employ to get a more substantial say in the way that is regulated post-Brexit."

The draft law will need approval from states and theEuropean Parliament.

Most euro-denominated of derivatives is performed by LCH, a unit of the Stock Exchange and the largest clearer of interest rate swaps used by companies to hedge against unexpected moves in borrowing costs.

LSE chief Xavier Rolet said on Monday that relocation would have little financial impact because it has a house in Paris that is fully authorised under rules. A global derivatives industry body warned on Monday thatshifting of euro-denominated derivatives from tothe European continent would require banks to set aside far morecash to insure trades against defaults, a cost that would bepassed on to companies.

Officials from the Bank of England, which supervises LCH, have warned that euro could shift to New York, but any U.S. house that became a "systemic" clearer of euro-denominated instruments would also come under the new rules.

Details of the draft law were first reported by the Financial Times on Monday.

(Editing by Alexander Smith and David Goodman)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)