LONDON — The European Central Bank proposed new powers to regulate euro clearing, which has become a key point of contention as the UK prepares to leave the European Union.
The ECB proposed a change to its statute that would give it “a clear legal competence in the area of central clearing,” the central bank said in a statement on its website on Friday.
The change would give the ECB, and other central banks in the euro zone, a major role in deciding which clearing houses would have to leave London to continue their euro-denominated business.
Around 75% of all euro-denominated contracts are cleared in London, at a nominal value of around €885 billion euros a year.
Clearing houses such as LCH and ICE Clear Europe in London manage credit risk, acting as a middle-man in swaps and derivatives trades to guarantee the contract in the event that one of the parties involved in the trade goes bust.
The EU proposed new powers on earlier this month for the ECB and market regulators to force them to relocate to Europe if they are deemed to be so important that their collapse would cause the rest of the financial system to fail.
As London prepares to leave the European single market as part of Brexit, a power struggle over the location of euro clearing has seen tensions rise on both sides of the channel.
The EU has argued that it cannot delegate power over derivatives contracts denominated in its core currency, the euro, to countries based outside of the EU.
“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,” Valdis Dombrovskis, the EU’s financial services commissioner, said in a statement announcing the bill.
Meanwhile, UK financial figures have said centralising the clearing business in London has saved billions and reduced risk.
Earlier this year Xavier Rolet, chief executive of the London Stock Exchange warned that moving the business out of London could cost investors up to €100 billion in the long run.
“London clears 18 major currencies and these multi-currency netting efficiencies meant LCH saved its customers $US21 billion in capital last year. Strip out euro clearing and you lose these efficiencies, potentially increasing cumulative trading costs by €100 billion over five years,” he wrote in the Times.
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