LONDON, Feb 2 (Reuters) - A tougher test is needed when deciding if clearing of euro denominated assets conducted outside the European Union should be relocated to the bloc, a senior EU lawmaker said on Friday.
The draft law is seen by Britain as an attack on the City of London financial district where an arm of the London Stock Exchange clears the bulk of euro denominated assets.
Britain, which is due to leave the bloc in March next year, is likely to welcome the softer stance in the report after euro clearing became a Brexit battleground with Brussels.
LCH and its regulator, the Bank of England, have warned that forced relocation would mean fragmenting markets in Europe, bumping up costs and potentially seeing the activity shift to New York.
The draft law proposes that the bloc could bar a significantly "systemic" foreign clearing house from serving banks and asset managers in the EU unless European regulators had full access to its operations to check on safety.
Such a bar would force the clearer to move operations to the bloc or lose the business.
The draft is being scrutinised by EU states and the European Parliament. Danuta Hubner, who is steering it through parliament, said in a report on Friday that it needed amending, but she stopped short of ditching outright the controversial forced relocation element.
The ability to deny recognition to a foreign clearing house is a last resort tool that should remain in place as an insurance mechanism to protect the financial stability of the EU, the report said.
"However, the process of denying recognition should be made more fact-based and evidence-based and offer more certainty to market actors," the report said.
A decision to deny recognition should be based on "a prior impact analysis and consider clear criteria".
Such reports help lawmakers reach an agreed position before thrashing out a final version with EU states, with many changes likely along the way.
The report said the definition of what would constitute a "systemic" foreign clearing house should be made far more granular by including its network of direct and indirect clients.
How easy or difficult it would be for a customer to find an alternative clearing house should also be taken into account, the report said.
EU regulators would have to study the "potential consequences, in terms of costs and benefits" of forcing a foreign clearing house to seek authorisation to operate in the bloc, it added.
Where a decision is taken to require relocation of clearing, there should be an "appropriate adaptation period" during which temporary recognition could continue, the report said.
Foreign clearing houses should also get 10 working days to respond to a request from EU regulators for information rather than the 72 hours proposed in the European Commission's draft law. (Reporting by Huw Jones, editing by David Evans)