By Huw Jones
LONDON (Reuters) - The European Union might grant temporary permission for clearing houses in Britain to continue serving EU customers if there is a no-deal Brexit next March, an EU document seen by Reuters showed.gi
LCH, a unit of the London Stock Exchange <LSE.L> clears the bulk of euro-denominated derivatives, contracts used by companies and banks to shield themselves against unexpected moves in currencies and interest rates.
But customers in the bloc would not be allowed to use LCH or other UK-based clearing houses if Britain crashed out of the EU without agreeing a deal, putting at risk contracts with a nominal value of trillions of euros.
"As regards cleared derivatives, it appears that there might be potential risks to financial stability in a no deal scenario," the undated document, which sets out the European Commission's draft contingency plans in case of a no-deal Brexit, said.
"On this basis, the Commission will continue to assess the situation and take the necessary measures to mitigate risks in this area," it added.
Financial industry bodies such as ISDA want the EU to authorise LCH to continue clearing euro-denominated contracts in time for next March to avoid potential disruption.
But such measures would be aimed at facilitating "a transition to achieving sufficient capacity within the EU", the document said.
Granting temporary authorisation for LCH and other clearers in London to continue serving EU customers would give euro one rivals such as Deutsche Boerse's <DB1Gn.DE> Eurex in Frankfurt time to absorb chunks of derivatives positions from Britain.
Transferring positions from one jurisdiction to another has never been done in a short time on a large scale before, and is a cumbersome process.
The European Commission had no comment.
The document is the clearest sign yet that Brussels is willing to take steps to mitigate a no-deal Brexit despite public silence in the face of increasingly strident calls from the Bank of England and market participants for joint action.
A senior UK regulator has said privately that persuading its counterpart, the European Central Bank, to back EU action publicly is proving to be very hard.
The BoE wants Brussels to mirror measures that Britain is taking to ease market concerns by allowing cross-border clearing to continue, and for derivatives and insurance contracts to remain valid in the event of a no-deal Brexit.
But EU financial services chief Valdis Dombrovskis said last week that the priority is for the EU and Britain to agree on a divorce settlement and transition period, which would do away with the need for no-Brexit deal measures.
Britain and EU leaders failed to make sufficient progress at a summit last week, and future arrangements for the border between the British province of Northern Ireland and EU member Ireland remain a major sticking point.
The document said that the risk of a no-deal Brexit to financial stability has "already diminished significantly" as banks and insurers adjust contracts or move activities to new hubs in the EU.
The document said that cross-border insurance contracts would "remain valid and the performance of existing obligations under the contract would generally continue to take place".
"The European Insurance and Occupational Pensions Authority is working with national authorities to address residual risks for certain EU27 policyholders," it said.
Cross-border bilateral or over-the-counter (OTC) derivatives contracts that are not cleared will also "in principle remain valid and can in almost all cases be executed until maturity", the document said.
"In view of this assessment, adoption of mitigating measures in these two areas is not part of the Commission's contingency planning."
(Reporting by Huw Jones, editing by Silvia Aloisi by David Stamp)