The draft law unveiled by European Commission vice-president Valdis Dombrovskis in Brussels on Tuesday 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.
Weaker than feared
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 the euro clearing business can remain in the British capital is set to be one of the most contentious issues when the UK negotiates its future trade relationship with the EU.
Brussels said last month it was exploring several options including the possibility of Britain keeping its euro clearing, while accepting strict EU oversight. But experts fear that this oversight might be so tough that many clearing houses would still want to relocate to EU member countries.
Bitter fight ahead
The London Stock Exchange has bitterly objected to any such relocation activities. "It's going to be complete chaos," LSE Chief Executive Xavier Rolet told reporters. "This has not been properly thought through."
Rolet argued a forced relocation of euro clearing to the EU would require a near doubling of the $83 billion (74 billion euros) that finance companies set aside for contract defaults. European financial experts say this figure is exaggerated.
But London lobbyists insist that an EU-ordered exile from Britain would only benefit Wall Street or Asia. "Forcing a move out of London would ultimately be detrimental and is in no one's interest," TheCityUK CEO Miles Celic said in a statement.
hg/jd/bea (AFP, Reuters)