UPDATE 3-EU derivatives industry deal on clearing collapses

(Adds industry meeting with clearers)

By Huw Jones

BRUSSELS, Jan 6 (Reuters) - A draft industry agreement to clear multi-trillion dollar credit derivatives trades centrally in the European Union by mid-2009 has collapsed, the bloc's executive European Commission said on Tuesday.

"A firm engagement was expected from the involved industry and regulators. This engagement has not been given," a spokesman for EU Internal Market Commissioner Charlie McCreevy said.

The introduction of central clearing for over-the-counter (OTC) contracts is a core plank of EU efforts to apply lessons from the credit crunch to make markets less risky for investors.

"The commissioner will therefore have to consider the appropriate next steps," the spokesman said.

McCreevy has sole power in the EU to propose regulation that would mandate central clearing of off-exchange traded credit derivatives and, separately, he has launched a wider review of the derivatives sector.

The derivatives industry agreed in principle at a meeting with McCreevy's officials on Dec. 10 to introduce voluntarily central clearing of off-exchange traded contracts within six months.

McCreevy has said central clearing would cut risk in a $47 trillion market at the heart of the credit crunch.

The Commission's objective was to set up a clear roadmap on how to ensure credit default swaps are cleared through a central counterparty, but some industry groups have been reluctant.

The deal collapsed over McCreevy's insistence that clearing of EU-based trades must be done inside the 27-nation bloc.

VARIETY OF SOLUTIONS

U.S. banks which also operate in the EU, such as Goldman Sachs (GS.N), Citi (C.N) and JPMorgan Chase (JPM.N), want to clear all trades in the United States where ICE (ICE.N) and others have emerged to offer clearing services.

Using just one clearer would also avoid the need to tie up capital in more than one pool of collateral at a clearing house to back trades.

"There are a variety of solutions for clearing. The EU is really overstepping its boundaries, pushing for an EU-based clearing house for European trading," a derivatives industry source said.