EU lawmakers set to curb derivatives competition
* EU lawmakers eye tough conditions on clearing competition
* Lawmakers seek to toughen up curbs on commodity derivatives
* Compromise to scrap mandatory licensing of benchmarks
By Huw Jones
LONDON, Sept 21 (Reuters) - European Union plans to increase competition in processing derivatives are set to be watered down next week according to documents obtained by Reuters, putting Britain and France on a collision course.
Regulators will require clearing houses to process vast swathes of the $650 trillion privately traded derivatives market from January 2013, under global reforms brought in to increase transparency and safety after the 2007-09 financial crisis.
Clearing houses stand between the two sides of a trade, ensuring the transaction is completed by tapping into a default fund if one side of the deal goes bust.
With derivatives clearing set to boom from next year, policymakers wanted to make sure customers had a choice of clearer.
The EU had proposed a sweeping update of its MiFID securities law to allow clearers "open access" to any trading platform to offer their services.
The proposal was designed to split open "vertical silos" or integrated trading-to-clearing exchanges like Deutsche Boerse and, from next June, NYSE Euronext in Europe which opens its own derivatives clearing house.
But members of the European Parliament's economic affairs committee, who are due to vote on the law on Wednesday, have already reached a cross-party deal on changes to the draft, set out in documents obtained by Reuters.
Those changes insert tough conditions on open access, particularly in the derivatives sector.
Open access would only be allowed for derivatives if it does not threaten the "smooth and orderly functioning" of the market, adversely affect systemic risk or fragment liquidity.
Trying to prove liquidity won't be fragmented will be extremely tough, making it hard to see competition in practice.
"Parliament's version of open access is definitely less scary," an exchange official said on condition of anonymity.
EU states have joint say with parliament on the draft law and they have yet to formalise their position. After Wednesday's vote both sides will sit down to thrash out a final text with further changes likely.
Britain has been vocal in pushing for relatively unhindered open access but faces opposition from France and Germany where Deutsche Boerse and NYSE Euronext are based.
A planned merger of the two exchanges was opposed by the European Commission because it would create a monopoly in exchange derivatives.
Big banks like Deutsche Bank, HSBC and BNP Paribas who trade the bulk of derivatives are likely to be dismayed by the compromise in parliament as it would be harder for them to use the threat of moving to a rival clearer to push down fees.
Deutsche Boerse will breath a sigh of relief following another cross-party compromise that scraps a provision giving anyone the right to buy a licence for proprietary benchmarks. The German bourse owns the Stoxx suite of indices, the most popular derivatives in Europe.
Lawmakers felt offering licences would be a recipe for court room dispute under intellectual property rights law.
The EU lawmakers will also vote on a cross-party compromise to crack down on what some see as speculators pushing up food and oil prices on commodity derivatives markets.
The original draft law proposes a regime of either hard limits on a position, or position management whereby a close eye is kept on positions. The compromise calls for both.
Curbs would not be needed for positions that "objectively reduce risks directly relating to commercial activity", meaning if it can be shown there is no speculation taking place, a tricky challenge.
Limits should also be tailored to reflect differences between spot or immediate delivery contracts and future contracts, the compromise says in a distinction exchanges will welcome as it would align European curbs with those already in place in the United States.
The prospect of tougher curbs has already prompted exchanges like NYSE Euronext to introduce delivery limits in Europe on its cocoa, coffee and sugar contracts.