EU has UK, US clearinghouse supervision on track despite Brexit chaos

While the UK considers what to do about Brexit, EU legislators are set to move ahead on the top priority in financial legislation before Britain’s departure.

Negotiators for the European Parliament and national governments will open final-stage discussions in Strasbourg tomorrow on a bill to revamp the supervision of clearinghouses. The key target is LCH, the London Stock Exchange Group unit that handles most of the derivatives of interest for the region. US-based clearinghouses CME Group and Intercontinental Exchange also are among those that would be affected.

The two sides may take several rounds of talks over two or three months to resolve their differences on the initiative. The legislation also delves into contentious points on the oversight of domestic clearing providers such as Deutsche Börse’s Eurex, as well as powers for the European Securities and Markets Authority.

But preparatory documents seen by MLex illustrate that the parliament and the Council of the EU, representing member states, already largely agree on how to handle LCH as well as other big foreign players, such as CME Group of the US.

The two sides are closer together on the “third-country” aspects — referring to relations with non-EU countries, as opposed to between fellow member states — than other elements of the bill, according to the documents, prepared by Romanian officials who are chairing council discussions for the first half of this year.

The Romanian officials will propose to work on those issues first in the talks with the parliament, as the “differences between co-legislators positions are limited and could be addressed more easily,” according to the memo, presented this week to officials from the other national delegations.

Among the differences will be the criteria for tagging “tier 2” clearinghouses, important to the European financial system, compared with “tier 1” providers handling more limited business. The big players get extra scrutiny plus the prospect that, if their risks can’t be contained, regulators could bar EU traders from working with them.

Still, the criteria differ in details more than in expected outcomes. For example, the parliament’s text would focus on measuring clearing business for EU firms, while the council version is keyed to the firms’ aggregate exposures.

The procedures and timing for tier 2 designations, as well as periodic reviews of those decisions, have additional, but minor, differences.

Both sides also set out similar procedures for regulators to order a “relocation” of clearing business back to an EU provider. The key difference, according to the Romanian documents, is the council’s verbal description that the move would be a “last resort” after other attempts to keep watch on the clearinghouse’s risks.

Central banks could impose the same types of orders on the non-EU clearinghouses, as well, under either text. The main difference is that the council bill offers a more open-ended set of areas on which those authorities could weigh in, the Romanian memo says.

The discussions could take four to five negotiating sessions, the Romanian officials predict. Even if that proves optimistic, the plans point to a deal within reach, if not before the UK’s last scheduled day in the bloc — March 29 — then by the time the parliament breaks for its elections in May. That keeps the law on course to take force before the end of 2020, the end of the planned transition period for Brexit.

Of course all Brexit timings are in question, after British lawmakers last night voted down Prime Minister Theresa May’s withdrawal deal with the EU.

Yet the plans for talks on supervision show that the EU is on track soon to handle the question of London clearinghouses.