EU committee backs law to relocate euro clearing from London to bloc

By Huw Jones

LONDON (Reuters) - An influential committee of European Union lawmakers voted on Tuesday in favour of a draft law aimed at shifting clearing of euro-denominated derivatives from a post-Brexit London to the bloc.

Long a Brexit battleground between London and Brussels, the EU wants better oversight of clearing in euro denominated interest rate swaps bought by EU-based market participants, the bulk of which are cleared by the London Stock Exchange Group (LON:LSEG) in the United Kingdom.

The European Parliament's economic affairs committee voted on Tuesday to approve the draft law that requires EU banks and asset managers to have an "active account" with an EU-based clearing house, in practice Deutsche Boerse (ETR:DB1Gn) in Frankfurt and the Madrid Exchange, for rate swaps.

However, the committee said that due to the "novelty of the requirement", requiring a specific portion of trades to be cleared through the account should only be "phased in gradually".

The European Commission could only impose mandatory volumes after it completes a cost/benefit analysis to assess the impact on financial stability and international competitiveness of EU counterparties, the committee said. EU securities regulator ESMA would also have to become the direct supervisor of clearers based in the EU.

"Providing the conditions for clearing members and clients to want to clear with EU CCPs (clearing houses) is the single, most effective and most sustainable way to increase clearing in the EU," said Danuta Huebner, a centre-right member of the committee who negotiated the compromise among lawmakers.

An account is considered active if it posts initial and daily variation margins, has in place the necessary IT connectivity, internal processes and legal documentation, the committee said.

An account must also demonstrate that its functioning would not be affected in the event of a significant and sudden increase in clearing activity, meaning it could cope with extreme market volatility in a crisis.

Parliament said it now intended to begin negotiations with EU states, who have joint say on the final text, before Christmas with completion before parliamentary elections next June.

Access for UK based clearers such as LSEG and ICE Clear, which clears Euribor futures, is due to expire in June 2025.

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LSEG CEO David Schwimmer has said he is "optimistic" that clearing in London for EU customers would continue after that date.

EU banks have warned that being cut off from global clearing pools in London would put them at a competitive disadvantage to international rivals.