EU finmins break deadlock over derivatives-sources

BRUSSELS Jan 24 (Reuters) - EU countries broke a deadlock in talks to crack down on the $700 trillion derivatives market, as France and Britain resolved a turf war over how much say a pan-European watchdog can have over national markets, diplomatic sources said.

The breakthrough on Tuesday means member states can move ahead to negotiate with the European Parliament on a final joint text as early as next week in a bid to comply with a globally agreed December deadline for the new rules.

EU regulators have tried to forge rules to drive derivatives on to exchanges since September 2010, but talks have been hampered by a British and French impasse over which regulator has ultimate say -- the pan-European ESMA or the national authority.

Finance ministers agreed that the EU's 27 national regulators can overturn the decision to allow a clearing house, such as Eurex Clearing, ICE or LCH.Clearnet, to operate in a national market by a two-thirds majority.

European Commissioner Michel Barnier drew up the draft law after the G20 in Pittsburgh in 2009 agreed that uncleared derivatives were instrumental in bringing large financial institutions such as Lehman Brothers and AIG to their knees.

Trades on most major stock exchanges, including London, go through a central counterparty, which can offset any losses borne if payments fall through.

The bulk of derivatives are traded off exchange or over-the-counter (OTC) among banks and vast amounts of contracts are set to be funnelled through clearing houses, sparking concerns among local regulators about how to maintain a strong voice.

Clearers and regulators in the City of London say they would prefer the onus for regulation and licensing of any central counterparty clearing house (CCP) to be at home, for technical rather than political reasons.

"On the national level the advantage is that regulators have to regulate a number of CCPs. They are going to be closer to CCPs. They are in a better position to exercise technical standards from ESMA," an industry source said.

On Tuesday, France also passed a new law requiring CCPs to have a national banking licence to operate in that market. The source said this was an attempt to clamp down on potential competitors.

An EU source said France was keen to have as many euro-denominated clearers as possible as these would have access to central bank liquidity if required. The source said the French were worried about bearing the cost of defaults not in euros.

"The use and security of CCPs are crucial from a G20 point of view and should not be subject to political debate," said David Clark, chairman of the Wholesale Markets Brokers Association (WMBA).

"Central banks realised a long time ago that if a CCP goes bust, they will have to stand by to resolve the mess. Agreeing a resolution process for CCPs remains the key issue," Clark said.

WMBA CEO Alex McDonald said CCPs are seen as narrow banks in Britain and may access liquidity lines from the Bank of England if need be, subject to certain conditions.

In September 2009, G20 countries agreed that all standardised over-the-counter (OTC) derivatives should be cleared through CCPs by end-2012 at the latest and that OTC contracts should be reported to trade repositories. (Editing by David Cowell)