European Union states agreed on Wednesday that banks and asset managers in the bloc must have an account with a clearing house in the EU to process business currently done in London, though stopped short of specifying minimum volume requirements for now.

London's dominance in key parts of euro derivatives clearing has long been a target of EU policymakers and the European Central Bank, who want direct oversight of the sector to maintain financial stability, particularly now that Britain has left the bloc.

EU states were approving a draft law that requires market participants to open and keep active an account at an EU clearing house for major contracts such as euro denominated interest rate swaps (IRS) and short-term interest rate futures.

Clearing in IRS is dominated by the London Stock Exchange Group in London, with ICE Clear in London a leader in Euribor futures, two contracts targeted by the draft law. Deutsche Boerse in Frankfurt and the Madrid Exchange look set to benefit.

"The active account requirement is a new requirement," EU states said in a statement. "The novelty of the requirement and the need for market participants to gradually adapt to it should be properly taken into account."

It mirrors the position adopted by a panel of lawmakers from the European Parliament, which has joint say on the draft law and will now sit down with EU states to thrash out a final text, meaning that market participants won't face having to shift a minimum amount of business in the short term.

Instead, EU states agreed the EU's securities watchdog ESMA can recommend "any action it considers appropriate, including recommendation for the establishment of new requirements when the legislative framework proves insufficient."

Market participants in the EU will have to report every six months to their regulator on the volume of clearing undertaken in the key contracts in the bloc, EU states said.

"The reporting shall also include a demonstration to the competent authority that the legal documentation, technological connectivity and internal processes associated to the active accounts are in place," they added.

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

UK clearing house access to EU customers is due to end in June 2025, but some form of extension is widely expected.

(Reporting by Huw Jones; editing by David Evans)