U.K. Swaps Clearing Giants Won’t Escape EU Grip After Brexit

(Bloomberg) -- U.K. derivatives clearinghouses would face tighter post-Brexit scrutiny from European Union regulators if they want to keep doing business in the bloc under an agreement announced by EU negotiators on Wednesday.

EU negotiators reached a deal on legislation creating tools to inspect and demand changes at foreign firms to ensure they meet the bloc’s oversight standards. The agreement caps a heated debate that erupted shortly after the Brexit referendum, a debate that was closely followed by U.S. regulators trying to fend off meddling by EU officials.

“Today’s agreement is essential to achieve legal certainty on the rules that will apply in the future, in particular as regards the way firms based outside the EU will be able to operate in the single market,” Romanian Finance Minister Eugen Teodorovici, whose government currently holds the rotating EU presidency, said in a statement.

Clearinghouses operated by CME Group Inc. and Intercontinental Exchange Inc. stand between the two sides of derivatives trades and hold collateral from both in case one party defaults. LCH Ltd., a unit of London Stock Exchange Plc, handles more than 90 percent of cleared interest-rate swaps, making it by far the world’s biggest clearinghouse as well as the primary target of the EU’s aim for greater control.

Joint Statement

The U.S. Commodity Futures Trading Commission and the European Commission said in a joint statement Wednesday that the EU will take into account any input from the U.S. regulator when fleshing out its rules, a signal that they’re working on setting aside their differences. CFTC Chairman J. Christopher Giancarlo had earlier said his agency might retaliate if the EU followed through on its plans to stiffen oversight of foreign clearinghouses.

Under the deal reached between representatives from the EU member states and the European Parliament, non-EU clearinghouses will be classified according to the level of risk they pose to the bloc’s financial stability. As a last resort, authorities will also be able to conclude that the activities of a foreign clearinghouse are too important for the bloc’s financial system, forcing it to set up shop in the EU to continue serving clients there.

The deal will also change the statute of the European Central Bank to ensure that it can fulfill new tasks, specifically “to adopt in extraordinary situations temporary requirements” on foreign clearinghouses, the parliament said in a statement. The Frankfurt-based institution will however not gain any new powers over firms based in the EU, it said.

--With assistance from Silla Brush and Ben Bain.

To contact the reporter on this story: Alexander Weber in Brussels at aweber45@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Gregory Mott, Jesse Westbrook

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