The European Union moved Tuesday to tighten its oversight of a key financial market based in London, threatening tens of thousands of jobs in Britain once the country exits the bloc.
Draft regulations published by the EU executive Commission would force any clearinghouse considered important to the EU financial system to accept direct oversight from the bloc and, if requested, relocate to inside the EU.
Clearinghouses act as intermediaries to reduce the risk of default by ensuring funds are delivered to the seller — a way of undergirding the financial system.
Even though Britain is not part of the euro, it is the home to the vast majority of clearing of euro-denominated financial contracts, which amount to almost $1 trillion every day. One report suggests that losing the market could cost the country 83,000 jobs, mostly in London, one of the world's top finance hubs.
Experts say it may not be so simple because there are legal hurdles to requiring the businesses to relocate, and that the Commission's move is mainly an effort to gain an edge in the upcoming Brexit talks.
The Commission says the proposals are part of the EU's drive to strengthen regulation of the financial industry after risky practices fueled the global financial crisis that began in 2008. Clearing firms are "systemically important," it says. So while current EU rules allow the Bank of England to regulate Britain's financial markets, the country's departure from the bloc raises the possibility of new scrutiny from EU authorities.
"The continued safety and stability of our financial system remains a key priority," Commission Vice President Valdis Dombrovskis said. "As we face the departure of the largest EU financial center, we need to make certain adjustments to our rules to ensure that our efforts remain on track."
While European authorities say they want euro-clearing to be handled inside the EU to ensure proper oversight, financial services firms around the continent would also benefit by prying the business away from London.
Representatives of Britain's financial industry immediately cried foul, arguing the EU was playing politics with a critical part of the international financial infrastructure.
"This kind of currency nationalism is likely to lead to less competition, higher costs and market fragmentation," said Miles Celic, chief executive of TheCityUK, an industry lobby group. "These are dangers that the U.S. watchdogs and international bodies have also underlined, and they should not be ignored."
Simeon Djankov, director of the Financial Markets Group at the London School of Economics, said the commission is making the same argument it used in 2014 when it last attempted to pull euro-clearing away from London. In that case, the U.K. successfully argued that the rules should be rejected by the European Court of Justice.
If the court were to rule that euro-clearing must take place in a eurozone state following Brexit, then those rules would also apply to transactions in the U.S. New York has the second-biggest market for euro-clearing after London, with some $200 billion a day in business.
And if these rules were applied to the United States, the U.S. government could take tit-for-tat action against the EU, arguing that dollar-denominated trading cannot take place in Europe.
"Normally that would not be likely, but under the current administration, it is very likely," Djankov said.
Simon Gleeson, regulatory partner at the law firm Clifford Chance, said that none of the proposed legislation would come into force until after the U.K. has left the EU.
"I think what is really going on here is the EU trying to create a bargaining chip that it can employ to get a more substantial say in the way that London clearing is regulated post-Brexit," he said.