The European Commission has unveiled proposals that could force London-based financial services involved in euro clearing to relocate to the continent after the UK leaves the European Union.

Stricter supervision of clearing houses

Draft laws announced by Valdis Dombrovskis, commission vice-president responsible for financial services and capital markets, would impose stricter supervision of clearing houses by EU central banks and the European Securities and Markets Authority (ESMA) and could force some operations to establish headquarters within the bloc.Almost three-quarters of euro-denominated derivatives transactions are currently cleared in London. Only about 1,000 people work at the London Clearing House but a report last year from EY estimated the loss of all euro clearing could result in the loss of 83,000 City jobs, once lawyers, accountants and IT professionals elsewhere are included.

Safety and stability of financial systems is a key priority

In a statement, Mr Dombrovskis said, “The continued safety and stability of our financial system remains a key priority. As we face the departure of the largest EU financial centre, we need to make certain adjustments to our rules to ensure that our efforts remain on track.”The commission's proposals, which will now go before the European Parliament and the European Union Council, would split clearing houses into two tiers, with 'tier 2' operations being forced to comply with EU central bank supervision and be subject to on-site inspections. They would also have to provide “all relevant information” to the ESMA.

Clearing: central part of London's financial infrastructure

Miles Celic, chief executive of the lobby group TheCityUK, commented, “Clearing is a central part of the infrastructure that makes London the leading international financial centre. It happens here because that is the most efficient and effective way to serve customers in Europe and the wider world.”He pointed out that the commission's proposals would not require all euro clearing take place within the EU but said Brussels had failed to provide “any real detail on when or how it might pull the trigger on a location policy”.He added, “Despite the commission recognising the cost a clearing location policy would pass on to European savers and businesses, it appears politically committed to exploring this further.“This kind of currency nationalism is likely to lead to less competition, higher costs and market fragmentation. These are dangers that the US watchdogs and international bodies have also underlined and they should not be ignored.”

Could increase firms' costs by up to 20 per cent

Catherine McGuinness, the City of London Corporation's policy chairman, said relocating euro clearing operations could end up hurting the EU itself. “In taking steps to shift power away from UK clearing houses, the EU could damage itself unnecessarily,” she said.“Fragmentation of foreign exchange and interest rate trading across Europe and the rest of the world could lead to firms' costs increasing by as much as 20 per cent. We are also concerned that a location policy would impact across the international ecosystem in terms of market fragmentation and could increase systemic risk.“The UK is the only place that can guarantee financial stability with the lowest possible cost implications.”Xavier Rolet, chief executive of the London Stock Exchange, has gone further, commenting, “It's going to be complete chaos. This has not been properly thought through.” He said the commission's plan would put hundreds of thousands of jobs at risk and cost more than £78 billion. The International Swaps and Derivatives Association has written to Mr Dombrovskis, warning him that any move to force relocations to remaining EU countries would drive up costs for the financial sector and “heighten financial stability concerns” by forcing traders and banks to find new bases for their operations.Last week the Futures Industry Association, a US-UK lobby group, warned that forced relocation of clearing services to the EU would double the costs to finance companies of guarding against contract defaults.For related news and features, visit our Brexit section.Access hundreds of global services and suppliers in our Online Directory  Get access to our free Global Mobility Toolkit

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