ECB Seeks Control Over London Trading After ‘Brexit’ – New York Times
Previously, banks typically traded many derivatives in secret with each other, making it difficult for outsiders to know what kind of risks might be lurking in the financial system. Although the system is more transparent, the stakes are raised if a clearinghouse has problems.
Although Britain has never been a member of the eurozone, London clearinghouses stand in the middle of transactions involving huge volumes of securities denominated in euros. One example is the so-called repo market, in which banks, hedge funds or other investors make short-term loans to each other using bonds or other securities as collateral.
The repo market is essential to the functioning of the eurozone banking system. In a statement Friday, the European Central Bank expressed worry about a lack of oversight should London clearinghouses have problems and create shock waves in the region.
The European Central Bank requested the additional powers at the urging of the European Commission, which has begun negotiating Britain’s divorce from the E.U. The commission wants to retain power to regulate clearinghouses that handle euro transactions and even force them to relocate to the eurozone, threatening thousands of jobs in London.
Mr. Véron said that the European Central Bank might have an interest in encouraging trading of euro securities to remain in London. Restricting trading overseas would undercut the central bank’s ambition to make the euro a global currency. Businesses and investors would be less likely to carry out transactions in euros if trading outside the eurozone were restricted.
Under the proposed legislation, the central bank would not directly regulate clearinghouses that handle euro transactions. That would be the responsibility of the European Securities and Markets Authority. But the central bank would have the power to monitor clearinghouse operations and take action in a crisis.
It’s a battle that the central bank has fought in the past. Last year, the bank lost a court fight over with Britain over whether it had the power to regulate clearinghouses. But in ruling against the central bank, the Court of Justice of the European Union said that the European Parliament could grant such powers if the central bank requested them.