By Francesco Guarascio
BRUSSELS (Reuters) - The European Union will not pick an immediate fight with the City of London over its right to clear euro-denominated securities, EU officials said on Monday, as Britain prepares to trigger the process of quitting the bloc.
On a day when the EU executive made public tough language on Brussels' policing of financial services providers from non-EU states - Britain's likely status in 2019 - the officials said new EU rules on derivatives trading would not reopen an old battle over clearing between Britain and the euro zone.
"Territorial restrictions are definitely not going to be part of the next review," one EU official told Reuters, referring to revisions to be proposed by the European Commission in the coming weeks to the European Market Infrastructure Regulation (EMIR), the main EU legislation on derivatives trade.
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A second official confirmed that was the case.
Britain won an EU court case two years ago to defeat a bid by the European Central Bank to deprive London of its leading role in clearing euro-denominated securities. The ECB wants such trades to be cleared in one of the 19 euro zone countries.
With Britain losing the protections of membership of the EU single market on Brexit, many experts assume euro authorities will make a new attempt to pull back clearing from London.
But with concern growing that ill temper may sour next month's expected start of the two-year Brexit negotiating process, the Commission appears set to step back from immediate confrontation over this issue with Prime Minister Theresa May.
Instead, the review will focus on cutting costs for small firms in the financial sector and extending beyond 2018 an exemption for pension funds from EMIR requirements.
A Commission spokeswoman said the proposal would include simplifications to some "targeted rules". Previous expectations were for more comprehensive reform of EMIR, including rules governing the location of clearing.
The executive has not shied away, however, from warning that London's position as Europe's dominant financial market may face problems on Brexit. In a somewhat unusual step, the Commission published an internal document that sets out the complexities of authorizing firms from outside the EU accessing its market.
And, the paper said, such decisions, by which the EU accepts that a foreign jurisdiction has "equivalent" prudential and other rules to those in the Union, can also be revoked.
"An equivalence decision may be changed or even withdrawn ...at any moment," the paper said.
The spokeswoman said the publication of a document that had been commissioned before the Brexit vote was not intended as a warning to Britain, or to the Trump administration in the United States. EU ministers are concerned both countries may be tempted to pare back financial regulation to attract global business.
Equivalence may let British financial firms access EU markets but EU Brexit negotiator Michel Barnier warned last month that Brussels will apply "special vigilance" over such approvals.
(Editing by Alastair Macdonald and John Stonestreet)