(Adds details, sourcing)
By Huw Jones
LONDON, Sept 15 (Reuters) - The European Union is set 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, an EU draft document showed.
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.
The European Commission declined to comment on Tuesday.
Although a low margin business, clearing is a critical
foundation for global financial markets, ensuring trillions of
dollars in swap trades complete safely.
London's clearing houses help cement the capital's status as
the world's biggest centre for trading derivatives, adding to
its historic attractiveness as a base for global banks.
Brexit has already prompted some to shift hundreds of jobs
to EU hubs, and lobby groups have warned that more could leave
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 euro derivatives clearing in London has long been a
point of tension between Britain and the EU, where policymakers
want euro zone activity under European Central Bank scrutiny.
'TIME LIMITED'
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.
The EU document, which was seen by Reuters and is out for
consultation among EU states since Monday, said access would
start on Jan. 1, 2021 and expire on June 30, 2022.
Industry officials expect a formal decision next week.
"This is going to be good news," one industry source said
after concerns that a shorter period was on the cards.
A European Commission official had told derivatives industry
officials last week that a decision to grant access would be
delayed from this week to later in the month due to Brussels'
concern over British moves to partly breach its Brexit
treaty.
Granting temporary access is aimed at giving time for euro
zone-based clearers to "further develop their capacity to clear
relevant trades", the document said.
Signed by European Commission president Ursula von der
Leyen, the document said the derivatives industry is also
expected to develop a "clear process" to reduce exposures to
systemically important clearing houses in Britain.
Access will also depend on the Bank of England cooperating
"closely" with EU authorities, and on the bloc's markets
watchdog ESMA having "immediate access in all situations" to all
information on risks from British-based clearers.
The Bank of England has warned the EU about "multiple hands
on the steering wheel" in a market crisis.
(Reporting by Huw Jones; Editing by Jason Neely, Mark Potter
and Alexander Smith)
