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Industry warns over failure to reach EU-US deal on derivatives

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[LONDON] Failure by European Union and US regulators to iron out differences in their derivatives rules would prompt "catastrophic" attempts by market users to pull out from American clearing houses, a senior industry official has warned.

World leaders agreed in 2009 to increase transparency in the market after the collapse of Lehman Brothers left regulators in the dark over who was on the other side of vast chunks of the failed US bank's derivatives transactions.

Brussels and Washington have been locked in talks over smoothing out rule clashes to avoid the global US$630 trillion market for interest rate, credit default and other swaps from fragmenting permanently and bumping up costs.

The EU's executive European Commission has already extended the deadline for a deal by over a year, with the current one expiring at the end of December.

Without a deal, EU market users who use American clearing houses would have to hold far more capital, a situation they would want to avoid due to cost.

A clearing house stands between two sides of a trade, ensuring its completion even if one side goes bust.

"So far, with respect to the clearing issue, the damage has been contained by the holding action of the commission," said Eric Litvack, chairman of the International Swaps and Derivatives Association trade body, on Tuesday.

He said that European users of clearing houses, like his employer, French bank Societe Generale, were looking nervously over their shoulders as the transatlantic talks continue.

No market user has "pulled the trigger" to withdraw their derivatives positions from a US clearing house so far.

"It would be catastrophic to try to withdraw positions from a major clearer in a short period of time," Mr Litvack told a news conference.

A European Commission official said, "Talks are ongoing and we're confident that they will be concluded soon."

The 28-country bloc's European Securities and Markets Authority (ESMA) has proposed changes to how cash is collected to back trades in case of default, to move closer in line with the US regime. "Will that solve the problem entirely?" Litvack asked.

Such a reform in Europe could change market behaviour and potentially create a new set of problems down the line, he suggested. "It's something you need to drill down into," he added.

REUTERS