LONDON- The European Union agreed on Tuesday to prolong until June 30, 2025 permission for Britain's clearing houses to continue serving customers in the bloc, with officials saying it would be the final extension.
Clearing has become a Brexit battle ground between Britain and the EU as the bloc seeks control over euro-denominated trades to build "strategic autonomy" in capital markets.
The London Stock Exchange's LCH unit in London clears about 90% of euro interest rate derivatives, a contract widely used by companies in the EU to insure themselves against unexpected moves in borrowing costs.
Mairead McGuinness, financial services chief at the executive European Commission, said she will also propose measures to reduce "our excessive dependence" on major clearers based outside the bloc and to improve the attractiveness of EU-based clearers while enhancing their supervision as volumes increase.
The EU was forced to extend clearing permission for LCH and two other clearers in London, ICE and LME Clear, after failing to persuade banks and their customers to shift the activity from London to Deutsche Boerse's Eurex in Frankfurt fast enough.
An abrupt end to cross-border clearing would have disrupted markets, but EU officials believe three years will be long enough to shift enough business without needing a further extension.
"It's clearly the end of the road, there will be no extension after those three years," an EU official said.
Eurex said on Tuesday that average daily cleared volumes in interest rate swaps grew to a record 276 billion euros ($314.75 billion) in January, a market share of 22%.
"In the long run, euro clearing has to take place in Europe," said Markus Ferber, a German member of the European Parliament, adding London has benefited from EU inaction.
The EU's 46-page consultation paper is asking for views on possible "negative and positive" incentives, such as forcing EU market participants to open and use a clearing account with the clearer in the bloc, and imposing targets on customers to cut their use of specific UK clearers.
Incentives could include hiking capital charges on EU banks exposures to UK clearers to encourage a shift in clearing across the Channel, along with forcing more private and public entities like asset managers and pension funds in the EU to clear their trades, an EU official said.
The range of products that must be cleared could also be broadened.
EU customers account for a minority of the London Stock Exchange's euro clearing business, and the bourse said it was focused on ensuring orderly functioning of markets. ICE had no immediate comment.
The four-week consultation period will be followed by a "communication" setting out the way forward, with a legislative proposal in the third quarter.
Data would be collected from market participants to monitor how their exposure to UK clearers is cut over time, but EU officials declined to say how much clearing would need to move to satisfy the bloc's authorities.
Banks have warned they could shift clearing from London to the United States, where clearing houses already have long-term access to EU customers.
Eurex focuses on euro-denominated clearing but banks say they want to stick with LCH in London because it offers clearing across several currencies to cut the amount of capital and collateral needed.
($1 = 0.8769 euros)
(Reporting by Huw Jones, Editing by Timothy Heritage, Bernadette Baum and Louise Heavens) ((firstname.lastname@example.org; +44 207 542 3326; Reuters Messaging: email@example.com))