EU removes last London obstacle to derivatives curbs

(LUXEMBOURG) - Big guns led by Germany, France and EU chair Poland, backed Britain into a corner before sealing a deal Tuesday for Europe to regulate trade in over-the-counter (OTC) derivatives.

"Our financial services will be stronger regulated on a healthy basis Europe-wide," European Union markets commissioner Michel Barnier, a former French foreign minister, told AFP on leaving talks delayed by rising concerns over debt-stricken Greece and banking woes.

"We will look at how to ensure there is no discrimination in the application of this regulation but this will not affect the City of London's standing in the industry," he said.

Britain's financial centre controls three quarters of the derivatives trade across Europe and half of the trade worldwide.

"Clear rules governing the trade will only strengthen Europe's position," Barnier added.

The new regulations require clearing houses that handle more than five percent of the market in a euro-denominated financial product to be based in the eurozone.

Britain had said beforehand it was happy to be "isolated in public" on this issue, a long-running sore that required G20 leaders to demand new transparency for a business where trillions of dollars change hands each year in London.

"We came here somewhat outnumbered," British Chancellor George Osborne admitted afterwards.

But he said his partners "agreed to changes" to make the impact of new regulations governing the clearing of trades "fair and non-discriminatory," in a reference to what he said remained an ongoing legal battle pitting Britain against the European Central Bank.

There was also a tweak to the voting system to require "mutual agreement" by EU supervisors where they disagree with British authorities, which Osborne said "in effect, removes a eurozone veto."

The complex slicing up of risk behind these often very hard to understand investment instruments was blamed for exacerbating the global recession following the 2008 collapse in the US home-loan market.

"The Brits got some of what they wanted, so the negotiations can now start with the European Parliament," said Barnier's spokeswoman Chantal Hughes.

The outcome was settled after talks between all 27 EU finance ministers in Luxembourg had "broken up and gone into a smaller format in an effort to find a compromise that London can accept," a spokesman for the Polish EU presidency told AFP.

The G20 guidance was for rules that would cover interest rate, equity, credit, foreign exchange derivatives and others types of instruments, many of which are hugely complex.

Last Wednesday, EU governments decided to over-rule Britain when ambassadors agreed that the regulation, as backed by 26 of the 27 EU states, was ready to go to the parliament, which normally happens within seven days.

In a joint letter signed by the heads of seven leading market trade associations, including the British Bankers Association, the City of London had relayed its concerns to Barnier.

"We are concerned that the forthcoming European Markets and Infrastructure Regulation (EMIR) does not take proper account of the likely concentration of clearing provision," they said.

"It may thus inadvertently, through legislation, embed lack of choice in European financial markets."

The signatories to the letter said investors, brokers and market middle-men in the City "all concur that this is an issue of significant concern."

They demanded changes to the new EMIR standards to "ensure that a clearing house must accept instruments for clearing regardless of the venue on which they are traded."

ECONOMIC and FINANCIAL AFFAIRS Council (provisional version) - Luxembourg, 4 October 2011