(Adds European Commission comment)
By Huw Jones
LONDON, Sept 15 (Reuters) - The European Union is expected
to throw the City of London an 18-month lifeline to continue
clearing euro derivatives after Britain's unfettered access to
the bloc ends in January, industry sources said on Tuesday.
Britain left the EU in January and continued access under
transition arrangements ends on Dec. 31, meaning EU banks would
not be allowed to use clearing houses such as the London Stock
Exchange's LCH and ICE Clear Europe in 2021.
Clearing is a critical foundation for financial markets,
ensuring that trillions of pounds in swap trades are safely
completed.
Although a low margin business, London's clearing houses
help cement its status as the world's biggest centre for trading
derivatives, adding to its attractiveness as a base for global
banks.
Brexit has already prompted banks to shift hundreds of jobs
to their EU hubs, and lobby groups have warned that more roles
could leave the British capital if euro clearing shifts to the
euro zone.
LCH clears the bulk of euro-denominated interest rate swaps
that are used by companies across the EU to insure themselves
against adverse moves in borrowing costs.
But the location of euro derivatives clearing in London has
long been a point of tension between Britain, which is keen to
maintain the City's pre-eminent role in global finance, and the
EU, where policymakers want euro zone activity under the eye of
the European Central Bank.
The EU has acknowledged that a sudden cut-off in access
could undermine financial stability as users sought to shift
large derivatives positions at short notice, giving it little
choice but to grant what it has dubbed "time limited" access.
Industry sources said they expected the bloc's executive
European Commission to offer Britain an 18-month extension in
euro clearing from January, subject to confirmation following a
consultation with EU states launched on Monday.
"This is going to be good news," one industry source said
after market concerns that a shorter period was on the cards.
A European Commission official had told derivatives industry
officials last Friday that a decision to grant access would be
delayed from this week to later in the month due to Brussels'
concern over UK moves to partly breach its Brexit divorce
settlement.
Granting only temporary access is aimed at putting pressure
on banks in the EU to shift positions from London's financial
hub and to give more time for euro zone-based clearers such as
Deutsche Boerse's Eurex to build up capacity and market share in
an orderly way.
The European Commission had no comment.
(Reporting by Huw Jones; editing by Jason Neely and Mark
Potter)