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Brussels has confirmed it will publish proposals to impose new controls on the City’s vast euro denominated clearing business before the summer, raising market fears that the bloc will demand vast pools of capital are moved out of London after the UK leaves the EU.
The European Commission said on Thursday it was looking at new legislation to oversee overseas clearing houses, especially ones that clear substantial volumes of euro-denominated derivatives and play a key systemic role for EU financial markets.
At present, as much as 75 per cent of the business are cleared in the UK, mainly at the LCH clearing house, which clears a rough notional €850bn a day in euro trades. The EU is concerned its regulators will not have as much foresight to step in and calm markets, either through increased supervision or via a funding backstop, and wants more direct oversight. Among the options include forcing the business to be cleared in the European Union.
The proposals were part of a conclusion to a long-planned review of EU rules from 2012 that toughened derivatives trading after the financial crisis. The law, the European Market Infrastructure Regulation (Emir), toughened standards across the industry, setting minimal rules on the collateral that investors must have to back their trades and covered a host of minor users for the first time. However many participants have criticised the scope and cost of Emir’s requirements.
“Our proposal aims to reduce costs and reporting burden for Europe’s companies without compromising financial stability,” said Valdis Dombrovskis, EU Commissioner for Financial Stability, Financial Services and Capital Markets Union.
Among the EU’s conclusions to the review were that pension funds would be given a further three-year exemption from clearing while the industry resolves how to clear their derivatives. Some European occupational pension funds struggle to have the ready supply of money or other highly liquid assets necessary to meet minimum clearing requirements.
The EU executive also plans to ease some reporting requirements for derivatives trading, requiring only one party to the trade to report the deal to a trade counterparty. At present the EU demands both sides of the trade report the deal. The move will bring it into line with US standards. It also proposes no longer require reporting on historic transactions, an issue known as “backloading” that has long vexed the industry. However the EU will give regulators more leeway to impose heavier fines on repositories.
Brussels also plans to ease the thresholds that smaller financial institutions and non-financial counterparties must breach before they are required to clear their derivatives. Howevever it is recommending that securitisation companies also be required to clear their trades. Lawyers warned would have a dampening effect on the European securitisation market.