The European Central Bank (ECB) has fired another warning shot in the battle for London's euro clearing market, after it proposed new rules which will give it regulatory powers over the market.
In a statement today it said it wanted to amend European central banking rules to give it the freedom to "provide facilities... and make regulations, to ensure efficient and sound clearing and payment systems, and clearing systems for financial instruments, within the Union and with other countries".
"These powers include a significantly enhanced role for central banks of issue in the supervisory system of central counterparties (CCPs), in particular with regard to the recognition and supervision of systemically important third-country CCPs clearing significant amounts of euro-denominated transactions," it added.
This would essentially give it powers over London's massive euro clearing market, monitoring and addressing perceived risks associated with clearing that could affect its monetary policy, the operation of payment systems and the stability of the euro.
Brussels moves in
The move comes as London attempted to defend its euro clearing market, which handles 90 per cent of euro denominated derivatives clearing activities.
Last week the ECB laid out a shake-up of its European Market Infrastructure Regulation (Emir) which tightened up rules for "systemically important" clearing houses operating outside the European Union. Although the shake-up avoided the "nuclear option", requiring all euro clearing activity to take place in the EU, it nonetheless unsettled the City.
"In no one's interest"
On Tuesday Bank of England governor Mark Carney defended London's euro clearing market, saying moving it out of the capital was in "no-one's interest", and could cause costs to rise tenfold.
"Fragmentation of such global markets by jurisdiction or currency would reduce the benefits of central clearing," he said.
"EU27 firms account for only a quarter of global activity in cleared euro interest rate swaps, and about 14 per cent of total interest rate swaps in all currencies cleared by LCH.
"Fragmenting clearing would lead to smaller liquidity pools in CCPs, reducing the ability to diversify risks and diminishing resilience. And higher costs would reduce the incentives to hedge risks, increasing the amount of risk that the real economy would have to bear."