Don't cut off euro clearing in London for now, says EU watchdog

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A bird flies past The Bank of England in the City of London, Britain, December 12, 2017. REUTERS/Clodagh Kilcoyne

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  • ESMA: relocation would cost 71 mln euros over two years
  • Incentives could include capital charges
  • LSEG welcomes backing for continued EU access

LONDON, Dec 17 (Reuters) - London's two big derivatives clearing houses should not be cut off from customers in the European Union until there are incentives to shift business to the bloc such as capital charges, the EU's securities watchdog said on Friday.

Even before Brexit, EU policymakers have long wanted multitrillion-euro clearing moved to Frankfurt where it can be overseen by its own agencies such as the European Central Bank, particularly in times of market turmoil.

Despite Britain's full departure from the EU a year ago, the London Stock Exchange (LSEG) (LSEG.L) still clears some 90% of the 100 trillion euro interest rate swaps market used by companies on the continent to hedge against adverse moves in borrowing costs.

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The bloc has sought to persuade banks to shift clearing from London to Deutsche Boerse (DB1Gn.DE) in Frankfurt but with little success.

The EU's European Securities and Markets Authority (ESMA) published its keenly-awaited report on Friday into whether euro clearing in London was of such importance that it should be relocated to the EU.

ESMA said it concluded that euro and Polish zloty clearing at LSEG and ICE Clear (ICE.N) were of "substantial systemic importance" and posed risks to EU financial stability which may not be fully mitigated under current rules.

But the costs and risks of stopping EU customers using London-based clearers would outweigh the benefits to the EU at this time, ESMA said.

In its heavily redacted report, ESMA estimated it would cost EU customers about 71 million euros to transfer positions from LSEG over two years, rising to 824 million euros if there is no transition period.

The watchdog proposed "appropriate incentives for reducing the size of EU exposures" to the two clearers in London.

These could include requirements for alternative clearing arrangements for clearing members or clients, and appropriate prudential requirements - capital charges - to "effectively incentivise" the participants to reduce their exposures.

"If these incentives are brought forward, we expect that the liquidity will shift in a way that makes the EU CCPs (clearers) attractive, the cost lower, the product offering broader," Froukelien Wendt, a member of ESMA's clearing supervisory committee, told reporters.

ESMA said it also wanted to widen its cooperation agreement with the Bank of England to give itself more powers to intervene in London clearers if they suffer failures.

LSEG said it welcomed ESMA's backing for continued access to EU customers. ICE declined to comment, and the Bank of England had no immediate comment.

The Futures Industry Association said ESMA's decision ensured continued access for EU clients to the global liquidity pools of UK clearers, safeguarded financial stability and prevented market disruption.

While much of Britain's financial sector is now cut off from the EU, Brussels allowed banks in the bloc to continue clearing contracts in London until June 2022.

The EU's financial services chief Mairead McGuinness has said she will propose a further, temporary extension, using the ESMA report to help her determine its length and end over-reliance on London.

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Reporting by Huw Jones Editing by Susan Fenton and Mark Potter

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