UK nears solution to clearing spat with ECB

LONDON, Sept 28 (Reuters) - Britain should win its battle with the European Central Bank over clearing houses if changes to a draft European Union derivatives law get final approval, EU diplomats said on Thursday.

Earlier this month, Britain sued the ECB in the European Court of Justice over the central bank's new rule requiring clearing houses like London-based LCH.Clearnet to set up shop in the euro zone because it handles large amounts of euro-denominated securities.

Ambassadors to the 27 EU states gave overwhelming approval on Wednesday evening to a new provision in a draft EU law on derivatives clearing that is being finalised, diplomats involved in the negotiations said.

The provision focuses on how supervisory colleges for clearing houses would operate.

"While performing their duties, no action taken by any member of the college should, directly or indirectly, discriminate against any member state or group of member states as a venue for clearing services in any currency," the provision states.

This means that unless the ECB complied, it could not be a member of a clearer's supervisory college, an unthinkable situation, the diplomats said.

"None of the delegations mentioned the provision as an issue so it is likely to stay," one of the diplomats said.

Britain has said the ECB location rule "contravenes European law and fundamental single market principles by preventing the clearing of some financial products outside the euro area".

LCH.Clearnet, in talks to be acquired by the London Stock Exchange , is one of the biggest clearers in the world and handles large amounts of euro-denominated transactions such as bonds and interest rate swaps. It declined to comment.

The U.S. Intercontinental Exchange has a London-based ICE Clear Europe operation clearing credit default swaps. The Chicago Mercantile Exchange also has British regulatory approval to clear trades.

Ambassadors approved the overall draft derivatives law by near unanimity, meaning the qualified majority needed among member states for it to pass was easily achieved.

The main aim of the law is to require central clearing of vast swathes of the $600 trillion off-exchange derivatives market to reduce risks and increase transparency.

EU finance ministers were expected to give the green light to the draft law on Tuesday, opening the way to a final agreement with the European Parliament, which has joint say.

Britain was the only country that declined to back the draft law on Wednesday evening but for reasons other than the clearing location provision.

While the draft law will exempt pension funds from clearing requirements on their derivatives trades for an initial period, Britain is unhappy with the way the exemption has been narrowly defined.

It has also wanted to give the European Securities and Markets Authority less sway over clearing houses. (Reporting by Huw Jones; Editing by Dan Lalor)