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15 September 2011 By Neil Unmack Follow @unmack1

The UK says the ECB’s policy on central clearing breaks EU law. The ECB’s requirement that euro-denominated products be cleared in the euro zone may be as much control-freakery as realpolitik, but London has reason to fear it could damage the City’s grip on derivatives dealing.

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The UK government plans to challenge a recent policy statement by the European Central Bank on central clearing. The ECB updated its location policy in June to say that central clearers that have a certain share of trading in euro-denominated financial products should be based and controlled in the euro zone. The UK argues that this challenges European Union law, as it would block free movement of services and capital across EU borders.

The ECB policy statement says that clearers that have a daily net credit exposure to more than five billion euros to any euro-denominated product should be based or controlled in the euro zone, citing the “potential systemic importance of securities clearing and settlement systems.”

Clearing houses will play an increasingly important role in financial markets as regulators insist that many over the counter derivatives are pushed onto central clearers, a process whereby a fund backed up by hard capital ensures a trade is completed even if one party defaults.

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