Bank of England warns on draft law for handling failed clearing houses

LONDON, Sept 29 (Reuters) - The European Union should not circumvent long-standing principles in insolvency proceedings when allocating losses from a failed clearing house, Bank of England Deputy Governor Jon Cunliffe said on Friday.

The bloc is scrutinising a draft law governing the closing down of a struggling clearing house, a third party that comes between both sides of a stock, bond or derivatives trade to ensure completion of the transaction.

Cunliffe said the draft law should stick to the legal principle of "no creditor worse off than in insolvency".

He said one school of thought was that regulators should have flexibility to tamper with this principle in order to preserve financial stability.

But this would raise the question of whose financial stability would be given priority bearing in mind that clearing houses operate across many countries, Cunliffe said.

"The UK does not support that approach," Cunliffe told a conference in London.

The arcane world of clearing has moved onto the political agenda since Britain voted to leave the EU in 2019.

The bloc has proposed a separate law giving powers to require clearing of euro-denominated trades to shift from the UK to the EU if it does not have joint supervision of clearers in London.

The BoE has a mechanism for closing down or "resolving" ailing banks, and Cunliffe said "in my view, the case is probably made for a resolution regime for insurers". (Reporting by Huw Jones; Editing by Greg Mahlich)