On May 4, the European Commission issued a policy statement discussing its plans to issue legislative proposals by the end of June to address “important and emerging challenges” in derivatives clearing.
The statement indicated that these proposals may include a requirement that the clearing of euro-denominated derivatives take place within the European Union, which would have the effect of forcing this business out of London after the U.K. leaves the EU. The policy statement held out the possibility, however, that “enhanced supervisory arrangements” would be sufficient.
The Commission observed that clearing services are concentrated in a limited number of clearinghouses, increasing their importance to financial stability and market functioning well beyond their home country. For this reason, there is a need to enhance the current supervisory arrangements, which tend to rely on home state supervision.
“In this context, the foreseen withdrawal of the United Kingdom from the EU will have a significant impact on the regulation and supervision of clearing in Europe,” the Commission said. “At present, as much as 75% of euro-denominated interest rate derivatives are cleared in the U.K. Derivatives denominated in some other Member States’ currencies are also cleared in the U.K. These transactions directly impact the responsibilities, including in the area of monetary policy, of the relevant EU and Member State institutions and authorities.”