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ECB, Bank of Engalnd reach accord on UK clearers handling euro trades

The logo is seen at the Bank of England in the City of London January 16, 2014. REUTERS/Luke MacGregor

LONDON/FRANKFURT (Reuters) - The European Central Bank and the Bank of England have reached a deal that strengthens the financial backing of British clearing houses in their handling of euro-denominated securities, ending a long-running legal battle. The agreement follows a court ruling, which has led the ECB to shelve a policy requiring clearing houses that handle euro-denominated securities to be located in the euro zone. [ID:nL6N0WT215] Britain had challenged the policy in the European Union's second-highest court, fearing it would damage London's role as a financial centre and fragment the European Union's single market. The court ruled earlier this month against the ECB. The ECB was concerned that if a London-based clearing house ran into trouble, it would not be eligible for direct support from the bank and the euros it could provide. Clearing houses stand between the two sides of securities transactions to ensure they are completed even if one side goes bust. Their business is set to grow sharply due to reforms to make derivatives such as interest rate swaps more transparent. The ECB and the BoE announced in a joint statement on Sunday that they had agreed to extend a deal under which the ECB could provide the British central bank with euros. The BoE also will provide the ECB with information on Britain-based clearing houses with significant euro-denominated business. The ECB and the UK government also agreed to end all legal action connected to the lawsuits that Britain had filed in the matter, the central banks said. The French central bank had led a drive to locate clearing houses in the euro zone, because France is home to one of the region's biggest clearing houses, Clearnet, whose London arm LCH.Clearnet , clears large amounts of euro-denominated securities. British finance minister George Osborne said Sunday's deal secures a principle of non-discrimination of countries outside the euro zone, including Britain. "This is vital to our relationship with the euro zone and is another step forward in terms of a reformed EU," Osborne said. Nicolas Veron, an EU financial services expert at think-tank Bruegel, said the agreement does not necessarily resolve the underlying issue of how to deal with the expected growth and risks from clearing houses that straddle borders. BoE Governor Mark Carney has cautioned they must not become a new breed of financial institutions that are "too big to fail". "This share of supervisory information might work. Will it work in a crisis? Nobody knows," Veron said. Cross-border clearers such as LCH.Clearnet are also major players in the United States. "The underlying challenge is even more so on a trans-Atlantic basis. Will this now become a template between the BoE and the Fed?" Veron said. (Reporting by Andrew Osborn and Huw Jones in London and Maria Sheahan in Frankfurt; Editing by Jane Baird)