FRANKFURT, June 20 (Reuters) - Forcing euro clearing out of London and into the European Union may be justified if the terms of Britain’s departure from the EU do not adequately control risks, European Central Bank Executive Board Member Benoit Coeure said on Tuesday.
Around 90 percent of euro-denominated derivatives are cleared in London. A European Commission draft law would give Brussels the power to deny recognition to a clearing house if it poses excessive risks or to require it to move to the EU.
“I believe that such an approach will be justified in case EU authorities are unable to adequately control risks and fulfill their mandates through other means,” Coeure said in a speech.
Clearing houses, like the London Stock Exchange’s LCH.Clearnet, and UK officials argue that forced relocation would split markets, increase trading costs and diminish the status of the euro.
Coeure said that the current framework, guided by EU law, giving the ECB some oversight and providing the European Court of Justice with jurisdiction, is appropriate.
But giving European courts oversight once Britain leaves the EU is a contentious issues and an eventual agreement is far from certain.
”The safety and soundness of central counterparties (CCPs) matters for central banks, and it matters a lot,“ Coeure said. ”What concerns us today in the context of Brexit is that the current EU regime regarding third-country CCPs was never designed to cope with major systemic CCPs operating from outside the EU.
“Indeed, this regime relies to a large extent on local supervision, and provides EU authorities with very limited tools for obtaining information and taking action in the event of a crisis.”
Current rules also require the ECB to be part of supervisory colleges scrutinizing clearing activities and to endorse supervisory decisions taken by national authorities.
Coeure added that the ECB would issue an opinion on clearing in the coming months but argued that the ECB needs to have a strong role.
Under the Commission proposal, if the European Securities and Markets Authority decides that a non-EU clearer is handling systemically important volumes of euro-denominated business, enhanced supervision would be required.
If such enhanced supervision is still inadequate, the activity would have to be moved, as a last resort. (Reporting by Balazs Koranyi; Editing by Larry King)