A new European Union law requiring closer scrutiny of foreign clearing houses used by customers from the bloc has been simplified after the United States threatened retaliation.
The law was triggered by Britain’s departure from the bloc as the London Stock Exchange ‘s (L:LSE) LCH clearing house clears the bulk of interest rate swaps denominated in euros.
U.S. regulators threatened retaliatory measures if Brussels began to closely supervise U.S clearers such as CME Group (O:CME) and ICE (Intercontinental Exchange) (N:ICE), saying it would increase their costs.
Brussels had dismissed the threats as “blackmail” but proposals for implementing the law published by the European Commission on Thursday rejected the catch-all approach recommended by the European Securities and Markets Authority (ESMA), the EU watchdog that will supervise foreign clearers.
The commission, the EU’s executive, said its proposals streamlined and simplified ESMA’s approach, making it easier and substantially cheaper for foreign clearers to predict how closely they will be supervised.
Foreign clearers used by customers from the EU will now fall into two tiers with different levels of supervision.
A clearer will only have to give ESMA the sort of access usually reserved to domestic regulators if it is deemed to be “systemic”. Otherwise, it will only have basic ESMA supervision.
A clearer will be deemed systemic if it clears more than a trillion euros of securities transactions denominated in EU currencies in a year, or its notional outstanding amount of swaps positions was over a trillion euros.
An industry official said the proposals mean that no U.S. clearing house is likely to fall into the tier attracting heightened ESMA supervision.
The EU has long wanted euro clearing to be based in the bloc rather than predominately in London and long-term EU access for the LCH has still to be determined.
LCH cleared swaps worth a notional 117 trillion euros ($133 trillion) in the 12 months to June 10, indicating it will almost certainly be deemed a systemic clearer under the new EU law.
LCH declined to comment on the proposals.