LONDON, Oct 3 (Reuters) - European Union banks should be allowed to continue using British clearing houses for derivatives transactions even under a no-deal Brexit, a top EU regulator said on Wednesday, in an effort to quell rising concern in markets.
With just six months to go until Brexit, Britain and the EU have still not agreed a divorce settlement that would include a "standstill" transition period from March until the end of 2020.
Cross-border banks fear that if Britain crashes out of the bloc, they could no longer use LCH, a unit of the London Stock Exchange that clears about 90 percent of euro-denominated interest rate swaps. There is too little time to move contracts from LCH to EU rivals before March.
LCH can't apply for EU authorisation as a foreign clearing house or central counterparty (CCP) until after Britain has left the EU, meaning a potentially destabilizing legal hiatus looms.
"To respond to those risks to the stability of EU financial markets, in my view we need to ensure continued access to UK CCPs for EU clearing members and trading venues," Steven Maijoor, chair of the bloc's European Securities and Markets Authority (ESMA) said.
It is the clearest signal yet that LCH in London would not face a problem obtaining EU authorisation. Scott O'Malia, chief executive of global derivatives industry body ISDA, called last week for such authorisation to be a matter of urgency.
Faced with a critical part of its financial system's plumbing being based outside the bloc, Brussels has proposed tougher supervision of foreign clearers if they want EU market access.
Maijoor urged "swift" approval of the draft law, "complemented by a transitional provision allowing for the continued access to UK-based CCPs."
LCH had no comment on Maijoor's speech to an audience of stock exchange executives in Athens.
Tim Cant, a financial regulatory partner at Ashurst law firm, said ESMA's backing for speedy action regarding British clearing houses would put an end to the "melodrama" that has surrounded EU pronouncements on the matter.
In another safeguard against disruption from a no-deal Brexit, Maijoor said there would be "memorandums of understanding" (MOU) with British regulators, allowing them to continue swapping information, crucial for enforcement cases.
"Taking the wider negotiations between the EU and UK into account, we plan to start negotiations with the UK Financial Conduct Authority with the objective to have these MOUs in place sufficiently on time before the end of March 2019," Maijoor said. (Reporting by Huw Jones; Editing by Mark Potter)