(AFP) The EU unveiled 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 unveiled by European Commission vice-president Valdis Dombrovskis will empower Europe to decide if post-Brexit London has the right to host financial market "clearing houses" that deal in euros, the EU's single currency.
Clearing houses are a key part of the financial system's plumbing, with trillions of euros being handled every year, mostly out of London.
"As we face the departure of the largest EU financial centre, we need to make certain adjustments to our rules to ensure that our efforts remain on track," Dombrovskis said in a statement.
The draft law is weaker than 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 is 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 stand at risk of a forced move of their euro clearing business to a bloc country.
"We are giving ESMA more powers to regulate European counter parties," an EU official said, in reference to the Paris-based European Securities and Markets Authority.
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, another source said.
The proposal is a short-term victory for the London Stock Exchange, which has warned of the high costs of relocation and that any forced move could be highly damaging to its clearing 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 decision.
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 Börse.
The draft law also proposes to centralise supervision of clearing houses dealing in EU currencies, in addition to the euro.
This would hand significant new powers to ESMA, which would work with the ECB and other EU 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.