By Huw Jones
LONDON (Reuters) -European Union plans to relocate clearing in euro denominated derivatives from London to the bloc should be phased in with no mandatory quotas on banks initially, a senior member of the European Parliament said on Wednesday.
The European Commission has proposed a draft law that would force banks in the EU to open "active accounts" at an EU-based clearing house to clear a yet-to-be-determined number of contracts such as euro interest rate swaps (IRS).
Clearing of euro IRS is dominated globally by London Stock Exchange Group (LON:LSEG)'s LCH arm in London, a source of concern for some EU policymakers since Britain's departure from the bloc. Voluntary efforts to persuade EU banks to shift clearing to Deutsche Boerse (ETR:DB1Gn) in Frankfurt have made only modest headway.
Danuta Huebner on Wednesday proposed a two-phased approach, with mandatory quotas ditched from the first phase to protect the competitiveness of EU market participants, giving time to encourage business in the bloc to build up.
Instead, there should be a stronger focus in the first phase on "supply side" factors to make clearing in the EU more attractive, such as making it faster for clearers to introduce new products, said Huebner, a member of the assembly's centre right EPP grouping.
"This is possibly the single most effective and most sustainable way to increase clearing in the EU," Huebner told parliament's economic affairs committee.
In a second phase, the EU's securities watchdog, ESMA, would assess if enough clearing had shifted to end excessive reliance on London, and whether quotas were required, Huebner said.
This phased approach introduces enough flexibility to address the tension between the political goal of cutting dependence on London and maintaining market competitiveness, she said.
She will lead parliament's negotiations with EU states from the autumn on a final deal, but must first find consensus among committee members.
Aurore Lalucq from the assembly's Socialist bloc said she would not support such a phased approach, and a European Commission official said "meaningful" active accounts were needed.
The EU has given Britain's clearers access to EU clients only until the end of June 2025. EU banks warn that quotas could leave their clients financially worse off by being cut off from efficient global pools of liquidity in London.
Huebner also proposed giving ESMA more supervisory powers over EU clearing houses, a step some EU states are likely to challenge.