EU Plans Power to Force Relocation of Euro Clearing After Brexit – Bloomberg

EU Plans Power to Force Relocation of Euro Clearing After Brexit – Bloomberg

EU Plans Power to Force Relocation of Euro Clearing After Brexit

June 12, 2017, 5:08 PM EDT

Firms that clear euro-denominated derivatives may be forced to relocate to the European Union from London after Brexit under EU proposals to be rolled out on Tuesday, according to a person with knowledge of the matter.

Under the European Commission’s plans for overhauling supervision of clearinghouses that are based outside the bloc, firms deemed systemically important to the EU financial system could be required to accept direct oversight by the bloc’s authorities, the person said, asking not to be named because the proposals aren’t yet public.

Firms could also be forced to move their euro clearing operations to a location inside the EU, the person said. This so-called location requirement has spurred warnings from the industry of skyrocketing costs, and has helped to turn clearing into a political football as the EU and U.K. prepare for divorce negotiations.

In a June 8 letter to Valdis Dombrovskis, the EU’s financial-services policy chief, the International Swaps and Derivatives Association said a survey of data from 11 banks showed that requiring euro-denominated interest-rate derivatives to be cleared by an EU-based clearinghouse would boost initial margin by as much as 20 percent.

The proposals to be published on Tuesday are largely in line with initial plans floated last month by the commission, the EU’s executive arm.

The Paris-based European Securities and Markets Authority would determine which clearinghouses are significant enough to be directly supervised, according to the person. If it determines that a firm should be subject to the location requirement, the relevant central bank and the commission would have to confirm the decision, the person said.

Clearinghouses stand between the two sides of a derivative wager and hold collateral, known as margin, from both in case a member defaults. U.K. firms including London Stock Exchange Group Plc clear as much as 75 percent of euro-denominated interest-rate derivatives.

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