BRUSELS: The EU will unveil plans Tuesday to give itself new powers over London's banking business after Brexit in a blow to the city's supremacy as a global financial hub.
The draft law to be unveiled by European Commission vice-president Valdis Dombrovskis will empower Europe to deny post-Brexit London the right to host financial market "clearing houses" that deal in euros, the EU's single currency, EU sources said.
Clearing houses are a key part of the financial system's plumbing, with trillions of euros being handled every year, mostly out of London.
The draft law, details of which first appeared in the Financial Times, is a watered down version from the forced relocation of euro clearing initially feared by London, in a sign that the EU does not want to overtly offend Britain only days after Prime Minister Theresa May embarrassingly lost her majority in British elections.
The issue of whether euro clearing houses can remain in the British capital was set to be one of the most contentious issues when Britain negotiates its future trade relationship with the EU after its departure.
Britain has jealously guarded dominance of the clearing house sector in Europe and won an EU court decision in 2015 against the European Central Bank in order to keep hosting the euro deals.
Still, under the draft law, vaunted financial firms such as the London Stock Exchange would need to adhere to strict EU oversight in order to avoid a forced move of its euro clearing business to a bloc country.
"The commission wants more time to study the impact of our proposal," a source close to the matter told AFP, who confirmed the accuracy of the version reported by the FT.
With the proposal, "the door remains open to the forced relocation" of clearing houses considered at risk of causing severe damage to the EU economy, the source said.
Complete chaos
The proposal is a small victory London Stock Exchange, which has warned of the high costs of relocation and that any forced move out of the UK could be highly damaging to its business.
"It's going to be complete chaos. This has not been properly thought through," LSE chief executive Xavier Rolet told the Sunday Telegraph ahead of the EU decison.
Last week the Futures Industry Association, a US and UK-linked lobby, warned that forced relocation to the EU would require a near doubling of the $83 billion finance companies set aside in case of contract defaults.
This figure however has been dismissed by Frankfurt-based Eurex Clearing, owned by Deutsche Boerse.
According to the draft, the law will also attempt to centralise supervision of the clearing houses dealing in EU currencies, in addition to the euro.
The bloc's Paris-based European Securities and Markets Authority (ESMA) would take the lead, backed by the ECB and national central banks.
London lobbyists insist that only Wall Street or Asia would benefit in the event of an EU ordered exile from Britain.
Forcing a move out of London, "would ultimately be detrimental" and "is in no one's interest," Miles Celic, chief executive of the TheCityUK, said last month.
But a senior German official said that the clearing sector was already moving out of London for the continental EU, given the hard line taken by London in the run up to Brexit talks.
"There is already movement... The first institutions are turning to ... the continent and especially here in Frankfurt," said Bundesbank board member Joachim Wuermeling to Handelsblatt, the German business daily.
"That's likely to increase massively as the talks go on, if the likelihood of a hard Brexit increases," he said.