The EU has given itself powers to press one of the City of London’s flagship businesses to move to the bloc as part of efforts to ensure financial stability after Brexit.
The European Parliament and national governments reached provisional agreement on Wednesday to set tough conditions for UK-based clearing houses, including the London Stock Exchange Group’s LCH, to maintain business with EU-based clients once the UK leaves the bloc.
Regulators see clearing houses as a critical part of financial infrastructure, since they act as central counterparties between sellers and buyers of shares or derivatives. London dominates the market for clearing euro-denominated trades, handling the vast majority of interest rate, commodity and credit contracts with a notional size of €660tn.
The measures agreed in Brussels require clearing houses to stick closely to EU capital requirements and other core regulations if they want to continue handling large volumes of euro-denominated trades for EU customers.
Clearing houses will also have to co-operate closely with European supervisors and central banks, including the European Securities and Markets Authority, an EU agency based in Paris.
Should Esma deem that these steps are not enough to protect financial stability, then the European Commission would be able to deny clearing houses vital regulatory permissions unless they moved their activities into the EU.
Brussels has argued that the powers are essential given the financial chaos that would be unleashed by the failure of a major clearing house.
Valdis Dombrovskis, the EU commission vice-president responsible for financial services, said that the rules were a natural reaction to “the departure of the largest EU financial centre”.
“The continued safety and stability of our financial system is a priority,” he said. “The EU is protecting financial stability while remaining very open to international integration.”
The new rules are a response to the prospect of the City falling out of the EU’s regulatory orbit after Brexit, and reflect complaints that LCH aggravated the eurozone’s sovereign debt crisis in 2011 by raising its margin requirements — the amount of capital that its users had to set aside to cover potential failed trades — on debt for Spain and Italy.
The move has also been championed by countries such as France that hope to increase their share of the lucrative clearing market after the UK’s departure.
While the plans were conceived with the UK in mind, they have come in for sustained criticism in Washington, amid concerns that US-based clearing houses could also be targeted for relocation, something US authorities warned would be “a violation” of transatlantic trust.
On Wednesday, the European Commission and the US Commodity Futures Trading Commission released a joint statement that put an end to the feud, emphasising the need for a dialogue between authorities and trust in local regulators.
Chris Giancarlo, chairman of the CFTC, welcomed the accord and said he expected it to mean that the US and EU would offer greater deference to each other to oversee their local markets “than is currently the case”.
The new EU rules, which have been the subject of extensive negotiation by governments and MEPs since they were proposed by Brussels in 2017, would apply in the event of a no-deal Brexit or at the end of a post-Brexit transition period.
Brussels has said separately that it would take emergency measures in a no-deal Brexit to allow EU clients to continue using UK clearing houses for one year, giving users time to adjust.
Negotiators for the parliament and Romania, which holds the EU’s rotating presidency, sealed a provisional deal on the rules during talks in Strasbourg on Wednesday.
The discussions gained urgency given the heightened risk of a no-deal Brexit after the UK parliament rejected prime minister Theresa May’s negotiated departure deal in a vote on Tuesday.
Brussels was also keen to get the rules adopted before parliament rises for elections in May.