By Huw Jones
LONDON (Reuters) - The European Union is set to implement a commitment to avoid disruption in the cross-border derivatives market if Britain crashes out of the bloc next March without a deal, an EU document showed on Tuesday.
British Prime Minister Theresa May's decision on Monday to delay a parliamentary vote on Britain's divorce settlement with the EU has increased the possibility of a no-deal Brexit.
This would leave EU customers cut off from UK-based market operators if no contingency measures were in place.
The divorce settlement would allow cross-border financial services to continue uninterrupted after March until the end of 2020.
The EU's executive European Commission had already said it would adopt contingency measures in case of a no-deal Brexit. The Bank of England had called on the EU to act on this pledge as a matter of urgency, and the document signals that Brussels is now ready to act.
It will come as a relief to clearing houses in Britain that must decide this month whether to tell EU customers to shift derivatives positions worth billions of euros from London.
The London Stock Exchange's
The draft "implementing decision" says that a "disorderly close-out" of derivatives positions may pose risks to financial stability.
"To prevent such risks, it is justified...to provide clearing services for a limited period of time," the document says. The exact length of time has not been filled in.
A "precondition" for a more permanent access to the EU market is what sort of trading relationship Britain will have with the bloc after Brexit, said the document, first reported by the Financial Times.
The draft decision sets stringent conditions for granting temporary "equivalence" or market access to EU customers, saying the bloc's regulators must be able to see the inner workings of clearers in a non-EU country.
The European Securities and Markets Authority (ESMA), the bloc's markets watchdog, should have access to "all information requested" on clearers in Britain on an "on-going" basis.
The exchange of information should include sensitive matters such as setting margins or how much cash customers of clearing houses should post to back their trades, and how they are "calibrated" in market crises.
ESMA should be allowed to share the information with the European Central Bank, and the approval to continue clearing would be "reviewed" if these conditions were not met, it added.
A revision of the bloc's derivatives rules now being approved already include the tougher terms for granting market access to foreign clearing houses that have provoked sharp criticism from U.S. regulators.
(Reporting by Huw Jones; Editing by Mark Heinrich)