European Commission Proposes New Laws to Control Euro Clearing After Brexit

The European Union is expected to propose a new system to ensure that the clearing and supervision of euro-denominated derivatives trades is controlled by EU institutions after Brexit, according to a European Commission’s proposal.

The Financial Times reported that the European Commission is due on Tuesday to propose a draft law on regulating foreign clearing houses, which has “specifically substantial systemic significance” to the financial system.

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The European Securities and Markets Authority will decide if a particular clearing house is key to Europe’s financial and economic stability. After that, the Commission will have tougher powers to force parts of the clearing house’s business to relocate to within the EU if it wants the regulatory approvals needed to operate smoothly within the bloc.

Without such an arrangement, a clearing house may not get some regulatory approvals, leading to operational problems such as European banks facing much higher capital charges when they use it to process their trades.

In the document, the lawmakers also called to charge the European Securities and Markets Authority (ESMA) with determining which clearing houses present systemic risks. ESMA will look at clearing houses based on the “nature, size and complexity” of their businesses, and on the aftershocks that would be felt in the markets if they were to fail.

The European Commission and European supervisors will make sure that important clearing houses apply the bloc’s regulations and stick to policies applied by the European Central Bank. LCH, the LSE-controlled clearing house that processes around three-quarters of global euro-denominated derivatives, will be outside the bloc’s legal system once Britain leaves the EU in 2019.

Around £440 billion of euro-denominated trade passes through Britain’s clearing houses every day thanks to so-called ‘passporting’ rules which currently allow them to sell their services freely across the rest of the EU and also give firms based in Europe access to Britain.

The Commission’s proposal has dampened hopes that London will end up hosting the euro-related operations after Britain voted to leave the EU nearly a year ago.