* LCH CEO sees French subsidiary taking bigger role
* France demanding clearing of euro instruments done in EU
* London-based LCH dominates clearing in euro instruments
LONDON, March 22 (Reuters) - Paris will overtake London as a centre for LCH's clearing of a core euro-denominated market after Brexit, the UK-based firm said as it seeks to head off French political demands for Britain to be frozen out.
Euro clearing has become a political battleground since Britain voted in 2016 to leave the bloc next March.
LCH, part of the London Stock Exchange, dominates clearing in euro-denominated instruments such as debt repurchase agreements and interest rate swaps from its base in Britain and increasingly from its French subsidiary.
France, however, believes that such a crucial role in bulk euro trades should not be handled by a clearing house outside the bloc, as LCH's London unit will be from next March when Britain leaves the European Union.
In what Britain sees as a grab for a core part of the City of London financial district, the EU proposed that "systemic" foreign clearing houses processing euro-denominated assets for EU customers must be open to EU supervision.
As a last resort, they should relocate to the bloc.
LCH Chief Executive Daniel Maguire said under a strategy began before Britain voted for Brexit, more euro clearing would move from London to its Paris LCH SA subsidiary.
"In 2018, we are aiming to offer clearing for as many euro-denominated debt repo products in Paris, as in London," Maguire told Reuters.
It now offers clearing in Paris in German and Belgian debt, in addition to the existing service for French, Spanish and Italian repo.
"This is about offering a choice to customers, rather than forcing a change. For example, some volume in Belgian debt has moved from London to Paris," Maguire said.
"Clearing in euro-denominated repos and debt is currently split equally between London and Paris but we anticipate gradual momentum of these products into LCH SA over time."
LCH cleared a record 175 trillion euros of repos across its London and Paris units in 2017, helped by expansion in the French capital.
Clearing involves passing stock, bond, derivative and repo trades through a third party backed by a default fund to ensure completion of the transaction even if one side of the deal goes bust.
France also wants a significant amount of the $873 trillion euro-denominated interest rate swaps (IRS) clearing done out of London last year to move to the single currency area.
But Maguire said policymakers and central bankers such as ECB President Mario Draghi were coming round to see a distinction between products.
Euro bonds and repos play a regional role in directly "transmitting" central bank monetary policy, while interest rate swaps are a global market and do not, Maguire said.
"If you make that distinction, then perhaps you can have different approaches to oversight and supervision," Maguire said.
LCH has no plans to voluntarily split its multi-currency IRS pool by enabling IRS clearing in Paris.
Rival Eurex, owned by Deutsche Boerse is stepping up attempts to attract euro IRS clearing and Maguire said he would continue to monitor such competition.
He sought to reassure EU policymakers that LCH would comply with the bloc's derivatives rules after Brexit.
"Our goal is to continue to provide the markets with a range of services, at our very high standards," Maguire said.
Since the financial crisis, clearers must show they could collapse without causing a market meltdown, but Maguire said this requirement does not fully reflect steps taken by users of clearers, such as banks to make themselves safer.
Such regulatory overlaps should be simplified to help focus clearers on fire prevention rather than fire fighting, he said.
"Yes, we should have the right degree of enhanced supervision and regulatory oversight, but it needs to be proportionate and service and product specific in order to be both appropriate and effective in all scenarios," Maguire said.
(Reporting by Huw Jones Editing by Alison Williams)