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European Commission plans to potentially force parts of the City of London’s prized clearing business to relocate after Brexit are getting bogged down because of governments’ reluctance to accept more centralised financial services supervision within the EU.
The Commission proposed in June to give the European Securities and Markets Authority (Esma), an agency based in Paris, more oversight of clearing houses, a key part of the infrastructure of financial markets.
The plans include a greater role supervising clearing houses operating within the EU, as well as ones based outside the bloc’s borders but doing lots of business with European companies. EU authorities would even have the power to decide that some clearing activities should be repatriated within the bloc if they were seen as posing a systemic risk.
But while governments have in general welcomed the idea of post-Brexit oversight of the City — and the chance to shift lucrative clearing from London to the EU — the plans could stall over national governments’ reluctance to hand Esma more powers over their own financial services industries.
“There is definitely sand in the wheels,” one national official said.
Diplomats told the FT that a number of capitals are resisting the extra Esma powers to oversee their clearing houses, arguing that it is an unnecessary whittling down of the role of national regulators.
Berlin has gone as far as to propose that the draft law should be formally split in two, allowing the parts dealing with non-EU clearing houses to be agreed and put into effect while other aspects of the proposals are dealt with later.
But the commission has insisted that the Esma powers over EU and non-EU clearing houses must be agreed hand in hand, otherwise European authorities could effectively end up with more oversight of what is going on in the City than they would have over EU financial centres.
Brussels says alternative plans suggested by governments mean European authorities could have more oversight of the City than of EU financial centres © Tolga Akmen/FT
Some governments, including Denmark, Finland and the Netherlands, also warn that splitting the legislation would set a dangerous precedent of governments cherry-picking the parts of the laws they want.
The June proposals were specifically a reflection of concerns about the London Stock Exchange-owned LCH, which dominates the processing of euro trades in the derivatives market, falling outside EU oversight after Brexit.
The Commission’s plans would allow Esma and the European Central Bank to set conditions that UK, and other non-EU clearing houses would have to meet in order to offer services to European clients.
The proposals have been billed by national officials as an important signal pre-Brexit of how the EU will police City clearing and other services to European companies.
But Brussels insiders point out opposition to more centralised supervision within the EU shows the difficulties of exercising strong European oversight of London post-Brexit without doing the same inside the bloc.
People involved in the talks point out that the European Parliament’s limited progress so far in reviewing the commission’s proposals means that governments have little need to reach a swift deal, as MEPs’ assent will also be needed to adopt the legislation.
Also, the UK’s wish for a post-Brexit transition deal is likely to postpone the date when the rules for non-EU clearing houses would apply to Britain. At the same time, governments are keen to make headway to settle key post-Brexit rules of the game for the financial sector.
“There are different possible ways forward,” said a spokesperson for Estonia’s EU presidency. It is “certain that the solutions to ensure sufficient safety of euro-clearing can be ready in a timely manner”, they said.