U.K. May Face Derivatives-Law Setback in EU

By Jim Brunsden - Dec 16, 2011 10:10 PM GMT+0700

European Union officials may abandon U.K.-backed safeguards on derivatives legislation, four people familiar with the situation said, a week after Prime Minister David Cameron’s demands to protect London’s financial industry almost wrecked an EU summit.

Ambassadors for the EU’s 27 nations, meeting yesterday in Brussels, discussed weakening an October agreement to grant national regulators powers over clearinghouses, according to the people, who couldn’t be identified because the talks are private. The British government has argued that the accord is essential to protect U.K.-based clearing firms from pressure to move part of their business to the euro area.

The possible unraveling of the derivatives deal follows Cameron’s decision to break ranks with French President Nicolas Sarkozy and German Chancellor Angela Merkel at an EU summit last week. The U.K. leader refused to join the 26 other nations in backing a new treaty for the bloc after he failed to secure safeguards that would have stopped EU plans to police financial services in London, Europe’s trading hub.

This “acts as a strong reminder that exercising the U.K. veto last week does little to strengthen the British hand on a range of issues of great importance to the U.K. financial system,” Richard Reid, research director for the International Centre for Financial Regulation, said in an e-mail.

ECB Lawsuit

The U.K. has sued the European Central Bank over its plans to prevent trades in some euro-denominated securities from being cleared outside of the 17 countries that share the currency. Britain also sought to thwart the ECB stance by seeking safeguards in the draft derivatives legislation.

National officials met today for further discussions on whether to change the October agreement, Kacper Chmielewski, a spokesman for Poland’s EU presidency, said in an e-mail. He declined to comment on the outcome of the meeting.

Polish officials and parliament lawmakers will meet on Dec. 19 to try and reach a deal on the draft law.

Lawmakers in the European Parliament “demanded” that the October compromise be reconsidered, according to an EU document dated Dec. 14 and obtained by Bloomberg News. The Parliament and national governments must agree on the law before it can be implemented.

Michel Barnier, the EU’s financial-services chief, has said that the U.K. demands at the summit would have granted the country an unacceptable opt-out from European rules.

Chantal Hughes, Barnier’s spokeswoman, declined to immediately comment and the U.K. government’s office in Brussels declined to comment.

‘Early Indication’

Losing protection for its derivatives industry would be “a very early indication of the potential damage done to the U.K.’s interests on a broad front of financial regulation driven from Brussels,” Reid said.

France’s market regulator, the AMF, today rejected any special treatment for the U.K. on the application of EU financial rules.

“In market regulations, it is clear we can’t have two sets of rules for one market,” Thierry Francq, the AMF’s secretary general told reporters in Paris. “It makes no sense.”

The EU Parliament “has always been strongly in favor of as much power as possible being vested in centralized EU institutions, and this issue was always going to face a rough ride there,” Simon Gleeson, a financial-services lawyer at Clifford Chance LLP in London, said in an e-mail.

It’s doubtful that national governments “will be prepared to move on this point,” Gleeson said, “since they will be concerned about taxpayer liabilities,” should a clearinghouse fail.

Clearinghouses such as LCH.Clearnet Group Ltd. and Deutsche Boerse AG (DB1)’s Eurex Clearing operate as central counterparties for every buy and sell order executed by their members, who post collateral, reducing the threat from a trader’s default.

To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net;

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.