Imminent EU court ruling has implications for London and beyond

By Huw Jones

LONDON (Reuters) - A top European court hands down a ruling on Wednesday that could have implications way beyond the obscure financial activities to which it directly relates, potentially ushering in a two-track EU with Britain and other non-euro zone countries out on a limb.

Britain has challenged a European Central Bank policy of requiring the "clearing houses" which help process trades in billions of euros worth of euro-denominated assets to be based within the single currency area.

The ECB believes this would make it easier to intervene if a clearer got into trouble.

But some lawyers say that if Britain loses the case at the General Court, part of the European Court of Justice in Luxembourg, the ramifications could be felt far beyond the arcane plumbing of financial markets, where clearing houses guarantee the completion of a stock or bond trade.

"If the UK loses, then it will make clear that the euro and its future is more powerful than that of the single market," said Rob Moulton, a partner at law firm Ashurst.

"For London to continue to act as Europe's key financial centre, it needs to be able to clear transactions denominated in a variety of currencies, not least the euro," Moulton said.

The ruling is due around 8.30 a.m. on Wednesday.

Under EU financial services rules, a bank or clearer authorised by one member state has a "passport" to offer its services across the 28-country bloc. A ruling against Britain on Wednesday could put this passporting system into question, along with the wider single market, lawyers say.

A setback for Britain, which has made little progress with other legal challenges in financial services, would come ahead of UK national elections in May in which the EU is a charged issue. Prime Minister David Cameron has promised a referendum if he wins in May, which could lead to Britain's exit, or "Brexit".

Karel Lannoo, chief executive of Brussels-based thinktank CEPS, said Britain must know that for different forms of EU membership, there are different rights and obligations.

"The same applies in the case of an eventual Brexit: even less rights, and even less obligations," Lannoo said.

A more specific implication if Britain loses is that LCH.Clearnet, a clearing house owned by the London Stock Exchange (LSE.L), could be forced to shift a large chunk of its operations from London to the continent.

LCH.Clearnet already has operations in France, ie within the euro zone, but a person familiar with the company said switching its SwapClear service to Paris would be a multi-year exercise.

(Editing by David Holmes)