The European Central Bank (ECB) is seeking statute changes to grant its governing council greater legal powers over euro clearing after Brexit.
The amendment would allow the ECB to take on a “significantly enhanced” role in regulating the lucrative market.
Ultimately, the Frankfurt-based ECB wants “clear legal competence in the area of central clearing” of euro-denominated financial contracts,” it said in a statement.
What is euro clearing?
Euro clearing is the processing of euro-denominated derivatives contracts.
At present, the practice is largely undertaken by London-based firms led by by clearing houses such as the London Stock Exchange’s (LSE) LCH.
London is the global leader for clearing all types of currency-denominated derivatives including the euro.
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Indeed, LCH is the world’s largest clearing house.
A clearing house stands between two parties in a deal to protect one against the risk of default by another.
It is the middleman for buyers and sellers of financial contracts tied to the underlying value of a share, index, currency or bond.
The volume of business is highly lucrative, and in London alone, can exceed a notional $900bn a day.
What does the EU want?
The ECB’s proposal follows calls from the European Commission to to move the euro clearing business out of London to the EU.
“The amendments will allow the Eurosystem to monitor and address risks associated with central clearing activities that could affect the conduct of monetary policy, the operation of payment systems and the stability of the euro,” the ECB said in a statement.
Current rules leave the EU with little control over how clearing houses in the UK are policed once Britain leaves the single market.
“Smaller firms would carry on operating under existing rules, while those deemed systemically important to EU financial markets would face stricter scrutiny and, ultimately, could be forced to move clearing of EU derivatives inside the bloc,” Bloomberg reported.
The ECB would only take over when dealings pose a risk to EU financial stability.
Forcing major non-EU firms to move their clearing business into the EU is the “only viable mechanism” to ensure the ECB can manage risks to financial stability, Bank of France governor Francois Villeroy de Galhau said on Thursday.
In 2011, the ECB claimed power over clearing, including the right to require that companies that clear euro-denominated derivatives and other contracts must operate in the currency zone.
However, the UK challenged the ECB on the issue in court and won.
In a judgment three years later the EU’s General Court ruled that the ECB lacked the authority to assume direct oversight of euro clearing.
What does the UK want?
The UK wants the euro clearing business to remain in London.
Mark Carney, governor of the Bank of England (BoE), was critical of any push to relocate the euro clearing business to the EU.
“Fragmentation is in no one’s economic interest. Nor is it necessary for financial stability,” he said earlier this week.
About three-quarters of trading in euro-denominated interest-rate swaps takes place in the UK, according to Bank for International Settlements data from April 2016.
LCH handles over 90 percent of cleared interest rate swaps globally and 98 percent of all cleared swaps in euros, Bloomberg reported.
The ECB’s proposals will be subject to the European Parliament’s approval.