As ‘Brexit’ Tensions Rise, E.U. Proposal Targets London Finance

Valdis Dombrovskis, a European Commission vice president, in Brussels on Thursday. “In the context of Brexit, we see that the situation is changing,” he said. CreditEric Vidal/Reuters

European Union officials fired an opening salvo on Thursday in a “Brexit”-related dispute that could threaten London’s status as the undisputed financial capital of Europe and affect hundreds of trillions of dollars’ worth of financial products.

In the course of a series of proposed technical changes, the European Commission, the executive arm of the 28-nation bloc, hinted that it may seek a more centralized role in supervising the complex financial contracts known as derivatives when they are denominated in euros. It also suggested that it could institute requirements that clearing houses, which act as middlemen in derivatives transactions, be located within the European Union.

Those rules, if enacted, could force clearing houses for derivatives to be regulated by European authorities even after Britain leaves the bloc, or to relocate part of their operations in order to avoid losing business to competitors.

The proposals, released in briefing documents on Thursday, form part of an increasingly heated negotiating process over Britain’s withdrawal from the European Union. Tensions have played out in recent days in newspapers in Britain and on the Continent.

 

“Of course, in the context of Brexit, we see that the situation is changing,” Valdis Dombrovskis, a vice president of the European Commission, said in a briefing announcing the proposals. Enhanced supervision of such markets had been in the pipeline for several years, he said, but Brexit made the proposals more urgent.

Prime Minister Theresa May of Britain has accused European officials of hardening their stances to “affect” the results of June 8 parliamentary elections. Her speech followed, among other things, a report in The Financial Times that European officials were preparing to ask for a payment of up to 100 billion euros, or about $109 billion, from London to cover its financial commitments as part of its exit.

The negotiations over the financial sector are particularly vital for London — the ability to serve Europe-based clients from London in the so-called single market has been a main driver of growth for Britain’s financial industry. Once the country leaves the bloc, that access will no longer be guaranteed: It will depend on the outcome of the talks.

One important question for financial companies has been the extent to which they will be able to clear and settle transactions in euros, including derivatives, outside the European Union.

Derivatives are financial contracts linked to the future value of assets between two persons or companies. Usually tied to currency or interest rate fluctuations, they are designed to reduce risks for a company or individual holding the underlying asset and are often negotiated privately, rather than traded on an exchange as stocks are.

About three-quarters of all euro-denominated derivatives transactions are cleared through Britain, according to the European Union. Cleared over-the-counter derivatives contracts — privately negotiated transactions that were handled through a firm acting as a middleman — accounted for about $337 trillion worldwide in the first six months of 2016, according to the Bank of International Settlements.

But on Thursday, the European Commission offered a series of proposed technical changes related to the reporting of derivatives transactions. In briefing documents, it said that it would be necessary for firms that “play a key systemic role for E.U. financial markets” to be subject to “safeguards provided by the E.U. legal framework. This includes, where necessary, enhanced supervision at the E.U. level and/or location requirements.”