By Huw Jones
LONDON, Oct 15 (Reuters) - The European Union is trying to
grab a slice of the City of London's multi-billion euro
derivatives market after Brexit but EU regulators risk driving
some of the business to New York from January if there is no
clarity on rules.
London is the world's biggest centre for trading derivatives
or swaps, but from December 31 it will lose direct access to EU
customers unless EU and British regulators avoid a clash over
where and how banks can trade these products.
In the meantime, EU bank branches in London might look to
platforms in the United States that can serve EU clients,
industry officials and regulators said. This would avoid getting
tangled up in conflicting UK and EU trading "obligations."
Steven Maijoor, chairman of the European Securities and
Markets Authority (ESMA), said there will be clarity before
year-end on where EU investors must trade derivatives like
interest rate and credit default swaps.
"The UK branches of EU entities are subject to both the EU
and UK derivatives trading obligations and we need to give
clarity on how to address that," Maijoor told Reuters.
One solution would be to allow EU branches in Britain to do
their derivatives business under UK rules, a proposal made last
year by Robert Ophele, chairman of France's markets watchdog
AMF.
This would allow the EU banks to maintain access to London's
highly liquid market in swaps on behalf of EU clients.
But the current lack of clarity could benefit New York which
competes fiercely with London in swaps trading.
Ophele, also an ESMA board member, has said that EU banks
could lose out on achieving the best prices in derivatives deals
if they are shut out of London and would have to shift some
hedging to the United States.
"The key issue for us is that whatever solution we come
forward with it also needs to be in line with legislation,"
Maijoor said, referring to the EU's securities law.
But the International Swaps and Derivatives Association
(ISDA) said it was unclear how EU branches in Britain would be
given flexibility fast enough in time for January if the
underlying EU law needs changing.
"Switching trades to U.S. swap execution facilities is not
necessarily straightforward as some clients may not be able or
permitted to do that," said Roger Cogan, head of European public
policy at ISDA.
He said if the EU granted "equivalence" or full access for
UK platforms to EU customers it would avoid fragmentation of
markets that is detrimental to prices.
Brussels wants reassurances from Britain that its rules on
derivatives will be aligned with the EU's regime before giving
the green light on equivalence, a request that makes UK
regulators bristle.
Britain's Financial Conduct Authority has said it will spell
out its own derivatives trading regime by the end of the year.
The best outcome would be equivalence, which would support
global capital markets, Maijoor said.
He also said that the European Commission will not be able
to decide on equivalence until it has sufficient information and
assurances from Britain that it will not deviate from EU rules.
(Reporting by Huw Jones. Editing by Jane Merriman)